UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998,
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
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)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of December 17, 1998 was $59,671,125 based upon the closing
price on the Nasdaq National Market(R) reported for such date. This calculation
does not reflect a determination that persons whose shares are excluded from the
computation are affiliates for any other purpose.
The number of shares outstanding of the registrant's common stock as of
December 17, 1998 was 12,494,029.
---------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated herein by reference:
Portions of the registrant's definitive proxy statement to be issued in
connection with registrant's annual stockholders' meeting to be held in 1999.
<PAGE>
TABLE OF CONTENTS
Page
PART I
ITEM 1. BUSINESS...................................................... 3
ITEM 2. PROPERTIES.................................................... 18
ITEM 3. LEGAL PROCEEDINGS............................................. 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 20
EXECUTIVE OFFICERS OF THE REGISTRANT.......................... 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................... 23
ITEM 6. SELECTED FINANCIAL DATA....................................... 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................... 26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK..... 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 32
ITEM 11. EXECUTIVE COMPENSATION........................................ 32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................... 32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K................................................... 33
SIGNATURES.............................................................. 42
Forward-Looking Statements
Statements in this Form 10-K, including those concerning the Registrant's
expectations regarding its business, and certain of the information presented in
this report, constitute forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. As such, actual results may
vary materially from such expectations. For a discussion of the factors that
could cause actual results to differ from expectations, please see the caption
entitled "Forward Looking Statements" in Item 1 and 7 hereof. There can be no
assurance that the Registrant's results of operations will not be adversely
affected by such factors. Registrant undertakes no obligation to revise or
publicly release the results of any revision to these forward looking
statements. Readers are cautioned not to place undue reliance on these forward
looking statements, which reflect management's opinion only as of the date
hereof.
2
<PAGE>
PART I
ITEM 1. BUSINESS
The Company
Covol Technologies Inc. is a technology development company focused on
"Recycling Yesterday's Waste into Tomorrow's Resources."(TM)
Company History
Covol was originally incorporated in Nevada in 1987 under the name
Cynsulo, Inc. Subsequently, the company acquired all of the issued and
outstanding shares of McParkland Corporation and changed its name to McParkland
Properties, Inc. The purchase of McParkland was rescinded in February 1989, and
the company's name was changed to Riverbed Enterprises, Inc. In 1991, the
company acquired technology consisting of binding agents used to make
briquettes. From 1991 to 1995 the company focused on the research and
development of binding agents principally for iron, coal and coke waste
particles. The company's name was changed to Enviro-Fuels Technology in 1991, to
Environmental Technologies Group International in 1994, and to Covol
Technologies, Inc. in 1995, at which time the company was reincorporated in
Delaware.
In 1995, management of Covol recognized the applicability of its
technology to the production of synthetic fuel. Since 1996, the primary focus of
Covol has been on developing and commercializing the synthetic fuel technology.
Background
As a result of efforts by government and business to balance
environmental concerns with the needs of business and recognize the need to
efficiently use diminishing resources, the recycling industry has developed and
pursued many endeavors to recycle, recover and/or enhance the usefulness of
wastes and by-products. Covol has developed a family of binder technologies used
to form fine materials from wastes and by-products into briquettes to capture
their inherent resource value.
Coal mines, ferrous and non-ferrous metals producers, and other
industries produce waste and other by-products. Cost-effective processes have
not been implemented generally to capture and use many such wastes, despite
their potential usefulness and potential value. Storage and disposal of many of
these by-products is costly and can be environmentally harmful. Covol's binder
technologies are designed to enable the conversion of by-products from the coal
and metals industries into valuable fuels and resources. Covol's primary focus
over the past two years has been the commercialization of the application of its
binder technologies to coal fines.
Covol's binder technologies are being used to transform coal fines into
a usable fuel. Coal fines are small particles of coal produced as a waste
by-product of coal production. Coal fines can be found throughout coal producing
regions of the United States and the world. A recent study of the coal industry
estimated that there are more than 2 billion tons of coal fines residing in
waste ponds and landfills in the United States alone. Millions of tons are added
to this amount each year. Although coal fines have inherent fuel value, they
present recovery and handling challenges that make it difficult to capture that
value. Covol's binder technologies molecularly bond the coal fines into a formed
fuel. Because this process is accomplished through a significant chemical
reaction, the resulting product has been classified as a "synthetic fuel" within
the meaning of Section 29 of the U.S. Internal Revenue Code. Sales of the fuel
therefore qualify for a significant tax credit. The resulting fuel is more
easily handled and transported than are coal fines. The composition of the
resulting fuel varies in its potential heat, ash and sulfur content and other
characteristics, depending primarily upon the composition of the coal fines used
as feedstock, and secondarily on the processing of the feedstock. The possible
end markets for the resulting synthetic fuel are as diverse as the markets for
coal. Different end users have different requirements for fuel type and quality,
3
<PAGE>
whether the fuel be synthetic or coal. The application of Covol's binder
technologies can be customized to address the specific needs of prospective
customers.
The Covol binder technologies can also be used to transform coke dust
into formed coke. Coke, which is processed metallurgical coal, is primarily used
in the iron making process as a reducing agent and also as an economical fuel
source. Coke dust, also known as "coke breeze," is a fine residue by-product
resulting from the production, handling and storage of coke and is marketable in
its "dust" state because of its high carbon and energy content. In tests, Covol
has succeeded in aggregating coke dust into hard briquettes designed to
withstand the weight, heat and other environmental factors inside of metal
making furnaces, which appear potentially marketable at prices above briquette
production costs.
The Covol binder technologies can also be used to convert iron rich
wastes into usable iron. Mill scale, bag-house dust, furnace sludge, blast
furnace dust and other iron rich materials, are all waste by-products created by
steel producers. These by-products present environmental problems for the steel
industry. Because of their high iron content, they also have high potential
value. Approximately 775 million tons of finished steel are consumed annually in
the world with the U.S. producing approximately 100 million tons. The capture of
even a fraction of the waste and other by-products of this steel production in
the U.S. alone could provide millions of tons of feedstock material for
processing. On a test basis, the Covol binder technologies have been
demonstrated to be capable of producing briquettes from such steel production
wastes. Such briquettes can be further processed in metal reducing furnaces to
form high grade pig iron, a common form of feed material used in the steel
industry.
Additional fuel or resource by-products to which the Covol binder
technologies appear applicable after initial testing include: molybdenum,
silicon carbide, grinding swarf, lead dross, zinc oxide, titanium dioxide,
phosphorous, and charcoal. Briquettes containing these by-products appear
potentially marketable to ferrous and non-ferrous metals producers and to other
industrial consumers.
Except for synthetic fuel production, the Covol binder technologies
listed above have not been commercially applied. No assurance can be given that
Covol will be able to implement these applications profitably.
Covol Binder Technologies
The Covol binder technologies are designed to aggregate and process
wastes and other by-products that are in a fine particulate state into usable
fuels and resources in the form of briquettes, pellets or extrusions. These
technologies also provide a way to "engineer" fuels or resources with
value-added qualities, such as moisture reduction, elimination or neutralization
of pollutants such as sulfur dioxide and nitric oxide, improvement of handling
strength, reduction of impurities, and formation into uniform shapes and sizes
to maximize efficiencies in combustion or in processing. The resulting products
manufactured using the Covol binder technologies are broadly categorized as
"engineered fuels" and "engineered resources" and can be marketed to utilities,
ferrous and nonferrous metal producers, and other major industrial users.
The Covol binder technologies chemically bond together fines, sludge,
and dust such as coal fines, iron production wastes and coke dust that up to now
have been considered by-products and waste materials. The process, in simplified
terms, mixes the resource-rich wastes or other by-products with a chemical
formula. The mixed materials are conveyed into a briquetter, a pelletizer or an
extruder which utilizes pressure together with a chemical reaction to bond and
shape the materials into the desired size and density required for the specific
application. The materials may be processed further to meet specific market
requirements.
Covol has licensed its technology to other parties to produce and sell
the products manufactured with the Covol binder technologies. Covol has
contracted with Dow Chemical Company to produce chemical binder materials for
the production of synthetic fuel made from coal fines. Substantially all of the
equipment and machinery used for producing synthetic fuel is considered standard
or "off-the-shelf" and is commercially available both domestically and
internationally.
4
<PAGE>
Covol has been issued seven U.S. patents and four foreign patents and
has other U.S. and foreign patents pending. The patented technology principally
relates to the application of Covol's binder technologies to iron production
wastes, coke, coal and other carbon based materials. Covol is in the process of
expanding the existing patents and applying for new patents related to waste
recovery applications. See "ITEM 1. BUSINESS - Proprietary Protection" for a
discussion of Covol's patents, trademarks and other intellectual property.
Business Strategy
The Covol binder technologies represent the foundation for Covol's
business strategy. Covol believes that its success depends upon its ability to
engineer industrial wastes and other by-products into value-added fuels and
resources. Covol has divided its strategy into four general approaches:
engineered fuels, engineered resources, licensing and technology transfers and
strategic acquisitions.
Engineered Fuels. Engineered fuels include fuels recovered or enhanced
primarily from carbon based materials. The Covol binder technologies provides a
use for fuel-rich wastes and by-products by aggregating them into a solid form
for improved handling and processing, and by making such modifications as may be
required for a given application of the resulting fuel, for example, reduced
moisture, increased hardness or enhanced energy content. Covol's engineered
fuels include the production of fuel from briquetted coal fines, coke dust and
silicon carbide.
For the past two years Covol's business strategy has been focused
almost exclusively upon synthetic fuel from coal fines. There are currently 24
synthetic fuel facilities located in 8 states that are utilizing Covol's
synthetic fuel technology. Twenty of the facilities are owned by unaffiliated
third parties and four are currently owned by Covol. Two of the four facilities
owned by Covol are under options to sell to licensees that would be expected to
pay royalties to Covol. Covol does not expect one of the options to be
exercised. Covol is actively pursuing the sale of the four facilities. Covol
intends to sell all or part of each facility that Covol owns. Covol has no
current ability to use the potential tax benefits that Covol's facilities can
produce.
Most of the synthetic fuel facilities were initially placed into
operation in the second calendar quarter of 1998 and Covol and its licensees are
currently in the process of ramping up production and entering into contracts
for product sales. Covol is working with its licensees to secure coal fines
feedstock, improve production and refine its chemical formulas. Covol and its
licensees are also negotiating sales and marketing contracts for the synthetic
fuel. Several of the owners of facilities are building or contemplating building
wash plants to wash the coal fines which are then processed into synthetic fuel.
Feedstock supply, production and product quality and the marketing of the
synthetic fuel all directly affect the amount and timing of royalties to be
received by Covol from the synthetic fuel facilities. Accordingly, assisting
licensees to optimize the production from these facilities is currently Covol's
highest priority.
Covol has received one-time advance license fees with respect to most
of the synthetic fuel facilities. In the future, most of the revenues related to
such facilities are expected to come from royalties that are tied to production
and sale of synthetic fuel pursuant to licensing agreements in place. Covol also
expects to generate net revenues from the sale of binder materials to the
facilities.
Covol believes that the Covol binder technologies may also be applied
profitably without the benefit of a tax credit. There are millions of tons of
coal fines in the U.S. and internationally that could be washed and briquetted,
and, in the opinion of Covol, sold at a reasonable profit above the fines
purchase and processing costs. Additionally, the Covol binder technologies are
well-adapted to the processing of "ultra fines," the face powder sized coal
fines created in preparing coal for industrial use. Ultra fines can be recovered
by equipping coal preparation facilities with modern float cell technology.
These ultra fines have historically been slurried into waste ponds and,
depending upon the preparation facility, might constitute as much as 10% of the
processed coal. The Covol binder technologies allow for the recovery of such
fines by removing the high levels of moisture they contain and forming them into
a solid product that can be handled and sold. Finally, there are certain coals
with high inherent moisture levels, such as Powder River Basin coals. The
processing of these coals with the Covol binder technologies may reduce the
moisture levels, thus increasing heat content, improving combustion
efficiencies, and
5
<PAGE>
reducing transportation costs because of the reduced weight. Covol intends to
aggressively pursue these and other similar synthetic fuel applications.
Another engineered fuel application Covol is pursuing is coke. Coke is
processed metallurgical coal which serves as both a fuel and a reducing agent in
iron and steel making. The production and handling of coke produces fine
particles of coke dust. The aggregation of coke dust into briquettes that are
designed to withstand the rigors of handling, heat and weight in metal making
furnaces results in a useable fuel. Covol has patented technology and is in the
process of patenting additional technology related to coke dust processing.
Covol has acquired property where coke and coke dust has been landfilled. Covol
intends to recover this coke and to briquette a portion of it for use as a fuel
as described above.
Silicon carbide is a product manufactured from a blend of carbon based
materials and high silica sand. In addition to its principle use in the
abrasives industry, silicon carbide is also used as an alloy and a high-quality
fuel in specialized metal making applications. This application is covered under
existing and applied-for patents. Covol has not yet applied the aggregation of
silicon carbide in a full-scale operation.
Engineered Resources. Steel mills, nonferrous metal producers and other
mineral industries produce wastes and other by-products that may contain
valuable unrecovered resources. These wastes often create environmental
compliance, storage and disposal problems. The Covol binder technologies provide
a way to solve disposal problems, extract the inherent resources, process the
materials with current industrial methods, and enhance the materials with
qualities that add value and that customize the materials for alternative uses.
The resulting products are collectively referred to as "engineered resources."
Covol has not yet commercially applied the Covol binder technologies in
engineered resources. However, Covol has devoted significant research and
development resources to improving and perfecting its technology for these
applications, particularly in the processing of iron production wastes.
During the steel-making process, steel mills produce, among other waste
by-products, small particles of iron-rich materials. The Covol binder
technologies are able to bind such particles into briquettes which can be
further processed in reducing furnaces to reclaim the iron and other materials.
Covol believes that products produced from such wastes could be marketed at
prices which are competitive with other sources of iron and that this technology
will be attractive in addressing the environmental issues surrounding the
disposal of waste by-products generated in the steel making process.
Covol will seek to enter into collaborative arrangements with steel and
iron producers to build, equip and operate briquetting and processing plants at
the producers' facilities. Covol believes that such arrangements will benefit
both Covol and the metal producers because they will:
o provide Covol with an ongoing supply of inexpensive iron tailing
materials while ensuring a ready customer for the briquettes produced;
o provide the steel producer with an economical means to dispose of waste
materials while providing a ready source of briquettes and/or iron
feedstock; and
o minimize transportation costs for waste by-products, raw materials and
briquettes, thereby increasing the economic competitiveness of Covol's
products.
Covol has developed and tested its technologies with other fine
particulate wastes and other by-products, including: molybdenum, titanium
dioxide, grinding swarf, lead dross, zinc oxide and phosphorous. Covol intends
to continue to evaluate these and other engineered resource applications.
Licensing and Technology Transfer. Covol believes that the Covol binder
technologies include valuable intangible properties in the form of patents,
processes, formulations and know-how. Covol intends to devote significant human
and capital resources in the continued development and refinement of various
applications of these technologies. Covol hopes to augment its own efforts with
technical support from major suppliers of binding
6
<PAGE>
materials. Covol has entered into licensing agreements with third parties for
the use of its synthetic fuel technology. Covol intends to actively pursue
additional licensing, joint venture and other collaborative arrangements with
coal, coke, ferrous and non-ferrous metals producers and other resource
producers to utilize Covol's technologies in recycling, recovering or enhancing
fuels and resources from wastes and other by-products, both domestically and
worldwide.
Strategic Acquisitions. Covol believes that it has a unique opportunity
to pursue acquisitions that are synergistic with Covol's financial and
environmental objectives and initiatives. The Covol binder technologies may be
applied to waste streams that are otherwise of little or no value. Covol intends
to pursue possible acquisitions of businesses aligned to the industries in which
the Covol binder technologies may be applied.
Covol intends to broaden its position in the synthetic fuel industry
and other resource industries through the acquisition or licensing of
technologies that are complementary to the Covol binder technologies.
Subsidiaries
Covol has organized various special purpose entities to facilitate some
of the transactions relating to the 24 synthetic fuel facilities. The entities
are listed with Covol's position and interest in the entity as of December 31,
1998 described as follows:
o Alabama Synfuel #1 Ltd., a Delaware limited partnership of which Covol
serves as general partner and owns 98%
o Utah Synfuel #1 Ltd., a Delaware limited partnership of which Covol
serves as general partner and owns 100%
o Flat Ridge Corporation, a Utah corporation, a wholly-owned subsidiary
of Covol
o Commonwealth Synfuel, L.L.C., a Utah limited liability company of which
Covol is managing member and owns 100%
The following chart illustrates Covol's corporate structure. Covol's
ownership of each subsidiary is 100% unless otherwise indicated.
[CHART OMITTED DESCRIBED AS FOLLOWS]
[Chart with box centered containing the word "Covol." A line is drawn proceeding
down from that box which divides into four branches, each of which terminates in
one of four boxes, all aligned horizontally, labeled respectively as follows:
o Alabama Synfuel #1 Ltd. (98% owned)
o Utah Synfuel #1 Ltd.
o Flat Ridge Corporation
o Commonwealth Synfuel, L.L.C.]
Tax Credits
Section 29 of the U.S. Internal Revenue Code provides a credit against
regular federal income tax with respect to sales of qualified fuel to an
unrelated party. Where more than one person has an interest in a qualified
facility, the Section 29 Credits generated by the facility are allocated
pursuant to the proportional interests of such persons in the facility.
7
<PAGE>
In order to qualify as a solid synthetic fuel produced from coal for
purposes of the Section 29 credit, the fuel produced must differ significantly
in chemical composition, as opposed to physical composition, from the raw
material used to produce it. Covol has received a Private Letter Ruling, or PLR,
from the IRS in which the IRS, based on representations made to it by Covol,
ruled that the synthetic fuel technology produces a significant chemical change
compared to coal fines and this qualifies the end product as a solid synthetic
fuel. Accordingly the IRS has ruled, based on the facts presented to it, that:
o Covol, with the use of its patented process, produces a "qualified
fuel" within the meaning of Section 29 of the tax code; and
o assuming the other requirements of Section 29 are met, the sale of the
"qualified fuel" will entitle Covol to claim the Section 29 credit in
the taxable year of sale.
In its ruling, the IRS noted that no temporary or final regulations
pertaining to one or more of the issues addressed in the PLR have been adopted
and that the PLR would be modified or revoked by the adoption of temporary or
final regulations to the extent the regulations are inconsistent with any
conclusions in the PLR. The IRS notes, however, that a PLR is not revoked or
modified retroactively, except in rare and unusual circumstances, provided that:
o there has been no misstatement or omission of material facts,
o the facts at the time of the transaction are not materially different
from the facts on which the PLR was based,
o there has been no change in the applicable law,
o the PLR was originally issued for a proposed transaction and
o the taxpayer directly involved in the PLR acted in good faith in
relying on the PLR, and revoking the PLR retroactively would be to the
taxpayer's detriment.
Covol received its PLR in September 1995. At least six other PLRs
covering twelve of the synthetic fuel facilities have been obtained by third
parties in connection with licenses of Covol's synthetic fuel technology.
However, all PLRs are only binding with respect to the specific projects
addressed in the PLR and may only be relied on by the party that has obtained
the PLR. The Section 29 credit is subject to the passive activity rules of
Section 469, and therefore may not be available to individuals and closely held
corporations.
The Section 29 credit is equal to approximately $6.10 in 1997 dollars
for each oil barrel equivalent of the qualifying fuel produced and sold. This
equates to approximately $20.00-$28.00 per ton of synthetic fuel briquettes,
depending upon the recoverable heat content. The oil barrel equivalent is
defined generally as an amount of fuel having a recoverable heat content of 5.8
million Btu's. The Section 29 credit allowed may not exceed the taxpayer's
regular tax liability reduced by certain other credits. The credit cannot be
utilized to offset the Alternative Minimum Tax.
The Section 29 credit was designed to provide protection for qualifying
fuels against market price declines, and it is therefore subject to a phase out
after the unregulated oil price reaches specified levels under an annually
adjusted formula. In 1997 dollars, the credit would have phased out had the
reference price for oil exceeded $47.78 per barrel, but the reference price
determined for 1997 was $18.92 and no phase out occurred. There presently is no
reference price for 1998. However, the average price of oil in the U.S. was
lower in 1998 than 1997. The credit is also subject to reduction insofar as an
otherwise qualifying facility benefits from grants or subsidized financing
provided by federal, state or local governments, or from tax-exempt bond
financing.
8
<PAGE>
Section 29 of the tax code contains no provision for carryback or
carryforward of Section 29 credits. Once earned, the credits are not subject to
subsequent recapture. By virtue of the various limitations and other factors
described above, there can be no assurances that any particular amount of
Section 29 credit will be allowable and usable.
During 1996, certain of the time periods applicable to the Section 29
credit were extended. The Section 29 credit will, under present law, be
available for sales of qualified fuels completed before January 1, 2008. The
qualified fuels sold must be produced at facilities placed in service by June
30, 1998. The synthetic fuel facilities must have been constructed pursuant to a
binding written contract in effect as of December 31, 1996.
Synthetic Fuel Manufacturing Facilities
The following table represents a summary of the 24 synthetic fuel
manufacturing facilities constructed and placed in operation before June 30,
1998 by Covol and its licensees.
<TABLE>
<CAPTION>
SYNTHETIC FUEL MANUFACTURING FACILITIES
No. of Annual Rated
Name of Facility Plants1 Location Owner/Licensee2 Operator Capacity (tons)3
---------------- ------- -------- --------------- -------- ----------------
<S> <C> <C> <C> <C> <C>
Utah Synfuel #1 1 Price, Utah Coaltech No. 1 Company 360,000
L.P.4
Carbon Synfuel 1 Price, Utah Company5 Company 360,000
Mohave Synfuels 1 Laughlin, Savage Industries Flyash Haulers, 280,000
Nevada Inc. Inc.
Birmingport 1 Mulga, Birmingham Syn Birmingham Syn 360,000
Alabama Fuel, L.L.C.7 Fuel, L.L.C.
Brookwood 1 Brookwood, PacifiCorp Syn PacifiCorp Syn 360,000
Alabama Fuel, L.L.C8 Fuel, L.L.C.
Pumpkin Center 2 Flat Creek, PacifiCorp Syn PacifiCorp Syn 720,000
#1 & #2 Alabama Fuel, L.L.C. Fuel, L.L.C.
Norton 1 Norton, PC Virginia Constellation 600,000
Virginia Synthetic Fuel #1,
L.L.C.
Chelyan 1 Chelyan, West PC West Virginia Constellation 600,000
Virginia Synthetic Fuel #1,
L.L.C.
Muddlety 1 Muddlety, West PC West Virginia Constellation 600,000
Virginia Synthetic Fuel #2,
L.L.C.
Eckman 1 Eckman, West PC West Virginia Constellation 600,000
Virginia Synthetic Fuel #3,
L.L.C.
Appalachian 2 Peccus, West Appalachian AT Massey 720,000
Synfuel Virginia Synfuel, L.L.C.
Mountaineer 1 Tallmansville, Company6 Savage 360,000
Synfuel West Virginia Industries Inc.
Pocahontas 1 North Fork, Company Company 360,000
Synfuel West Virginia
9
<PAGE>
Ginger Hill 1 Ginger Hill, Ginger Hill Maple Creek 300,000
Pennsylvania Synfuels, L.L.C. Mining
Robena 1 Paisley, Robena, L.L.C. Consolidation 580,000
Pennsylvania Coal
Commonwealth 1 Karthaus, Company River Hill Coal 360,000
Synfuel Pennsylvania
Pennsylvania 1 Somerset, Somerset Fuels, Somerset Fuels, 600,000
Synfuel Project Pennsylvania L.L.C. L.L.C.
USA Coal, #1, 4 Pawnee, Illinois A.J.G. Financial USA Coal 1,440,000
#2, #3, & #4 Services, Inc.
Pleasant Ridge 1 Alledonia, Ohio Pleasant Ridge Ohio Valley 340,000
--- ----------
Synfuels, L.L.C. Coal
Total 24 9,900,000
==== =========
</TABLE>
1 A plant is a finished synthetic fuel manufacturing facility constructed
pursuant to a binding construction agreement entered into on or before
December 31, 1996.
2 Most owners/licensees are special purpose entities owned by one or more
other companies.
3 This is an amount as engineered and determined by equipment manufacturers.
Most facilities are not yet operating at rated capacity. There is no
assurance that the facilities will operate at rated capacity in the future.
4 Coaltech No. 1 L.P. consists of AJG Financial Services, Inc., a
wholly-owned subsidiary of Arthur J. Gallagher & Co., and Square D Company,
a wholly-owned subsidiary of Groupe Schneider, as limited partners, and
Covol as 1% general partner. Covol has entered into an operating agreement
with Coaltech to operate the Utah Synfuel #1 facility.
5 Covol granted Coaltech an option to purchase the facility, but does not
expect the option to be exercised.
6 Covol granted Mountaineer Synfuel, L.L.C. an option to purchase the
facility, which option expires in January 1999. The purchase option
transaction for the Mountaineer facility provides that Covol is the
managing member of Mountaineer Synfuel, L.L.C.
7 Birmingham Syn Fuel, L.L.C. is an affiliate of PacifiCorp Financial
Services, Inc.
8 PacifiCorp Syn Fuel, L.L.C. is an affiliate of PacifiCorp Financial
Services, Inc.
Covol Contracts. Consistent with the requirements for obtaining Section 29
tax credits, in December 1996 Covol entered into fourteen design and
construction agreements for the design and construction of new synthetic fuel
manufacturing facilities each having capacity of approximately 360,000 tons per
year. Depending upon the specific agreement, the contractor was either TIC,
CEntry Constructors & Engineers, PICOR or Centerline Engineering Corporation.
The PICOR contracts were part of a joint venture with Savage Industries. The
construction agreements, among other things, required that the plants be placed
in service no later than June 30, 1998.
Covol obtained financing and successfully constructed five facilities from
its construction agreements. Of these, one was built by TIC for Covol and sold
to Birmingham Syn Fuel, L.L.C., a special purpose entity owned by PacifiCorp
Financial Services, Inc., two were built for Covol by Centerline and are under
option for sale to Mountaineer Synfuel, L.L.C. and to Coaltech No. 1 L.P., and
two were built by TIC and are held for sale by Covol.
10
<PAGE>
Covol assigned four other construction agreements to licensees and those
licensees successfully constructed four facilities as follows:
Fluor Corporation. Covol assigned two of its fourteen construction
agreements to Appalachian Synfuel L.L.C., a wholly owned subsidiary of Fluor
Corporation. The facilities were built at A.T. Massey Coal Company, Inc.'s
Marfork Prep Plant Site near Peccus, in Boone County, West Virginia. In
conjunction with the assignment of the two contracts, Covol entered into a
license agreement with Appalachian for the use of the Covol binder technologies.
Under the agreement, Covol was paid an advance license fee. A quarterly license
fee is also to be paid based upon the Btu of product produced and sold up to a
prescribed amount of production per year. Covol also granted Appalachian the
right to pay a lump sum payment for the facilities, in lieu of quarterly license
fees over the term of the agreement. Covol will provide binder to the facility
on a cost plus basis.
Pelletco Corporation. Covol assigned two of its construction agreements
with Centerline to affiliates of Pelletco Corporation. One contract was assigned
to Pleasant Ridge Synfuels, L.L.C. which constructed a facility in Alledonia,
Ohio. One contract was assigned to Ginger Hill Synfuels, L.L.C. which
constructed a facility at Ginger Hill, Pennsylvania. In connection with these
two facilities, Covol entered into technology license and agreements to supply
Covol's chemical binder, providing Covol with advanced license fees and
quarterly license fees equal to 50% of the licensees' net cash flow. Covol will
provide binder to the two facilities on a cost plus basis.
Unused Contracts. Covol did not build facilities under five of its fourteen
construction agreements, including the two PICOR contracts as part of a joint
venture with Savage Industries. The construction agreements provided for
penalties if the construction was not pursued by Covol. Covol accrued this
liability during the fiscal year ended September 30, 1997, of which the
remaining liability at September 30, 1998 is $755,000. Covol believes that
construction under any of the five unused contracts is not likely.
Additional Licensed Facilities. In addition to the nine facilities
constructed under Covol's construction agreements, Covol licensed its technology
to eight licensees for use at fifteen facilities constructed by these licensees.
In total, Covol has licensed or constructed plants using the Covol binder
technologies at 24 synthetic fuel facilities that operate at 18 locations in the
Rocky Mountain region, Southern Appalachia, Central Appalachia, Northeast
Appalachia, Northwest Appalachia, and the Illinois Basin, which are the primary
coal supply regions of the United States.
A facility generally consists of a conditioner and binder additive and
mixing system, briquetting or aggregating equipment, a product dryer, and other
supporting systems. However, each facility was individually engineered and
constructed, including systems and components specially selected by the
respective owners, so that there is variation in features from facility to
facility. Covol has manufactured and sold binder mixing plants for installation
at synthetic fuel manufacturing facilities. Six such plants were manufactured
and sold in 1998.
License and Binder Supply Agreements. All non-Covol entities that have
constructed or own facilities using the Covol binder technologies have entered
into a technology license and binder supply agreement with Covol. Most license
agreements provide for an advance license fee of $1.39 per ton of rated
capacity, payable upon reaching project milestones. Covol has received most of
the advance license fees related to these facilities. In addition, pursuant to
the license agreement, the licensee pays a quarterly earned license fee at a
prescribed dollar amount multiplied by the recoverable heat denominated in Btu's
in the product produced and sold during the calendar quarter. The prescribed
dollar amount is subject to adjustment based upon the "inflation adjustment
factor" as set forth in Section 29 of the tax code. In some cases, the amount to
be paid is subject to adjustment to the extent that licensees incur an operating
loss on the production and sale of synthetic fuel, exclusive of the amount
licensees pay as a license fee for the use of the technology. Some license
agreements also provide for a goal fee based on time schedules and production
amounts. The license agreements generally have a term until the later of January
1, 2008 or the corresponding date after which tax credits may not be claimed or
are not otherwise available under Section 29 of the tax code.
11
<PAGE>
Covol also agreed, pursuant to the binder supply agreements, to provide
binder material to licensees for the manufacture and production of synthetic
fuel. The price for the binder sold to the licensees falls into two categories:
o a fixed price, or
o an amount equal to Covol's cost plus a prescribed mark-up.
In some cases, the mark-up may be reduced to the extent the licensee incurs
a loss on the production and sale of synthetic fuel, but not below Covol's cost
for such binder materials. The binder is currently manufactured by Dow Chemical
Corporation for Covol utilizing Covol's patented and proprietary technology.
Covol arranges with Dow for shipping of the binder directly to the facilities.
Pace Loan. In December of 1996 Covol entered into license agreements with
affiliates of Pace Carbon Fuels, L.L.C. (collectively "Pace") for the use of the
Covol binder technologies at four synthetic fuel manufacturing facilities owned
by Pace. In 1998 Pace requested a reduction in the license fees payable to Covol
under the license agreements. Upon condition of immediate payment by Pace of
advance license fees, Covol agreed to a reduction in future license fees. This
reduction was accomplished by a ten year loan agreement whereby Covol would loan
to Pace up to $750,000 each quarter beginning in November 1998. Covol's loan to
Pace will be repaid at the end of the ten years only if the Pace projects have
accumulated sufficient prescribed earnings. Pace has requested a loan of
$750,000 for the November 1998 quarter. Covol believes that its current loan
obligation to Pace is limited to the earned license fees payable to Covol for
the quarter ended September 30, 1998, which is believed to be approximately
$300,000. Pace and Covol are negotiating in an attempt to resolve their
differences.
Covol Synthetic Fuel Facility Operations
Covol is the operator at three facilities: Utah Synfuel #1, Carbon Synfuel,
and Pocahontas Synfuel. Of these facilities, Utah Synfuel #1 is not owned by
Covol, and Covol operates the facility under agreement with the owner, Coaltech.
The operating agreement provides that Covol will act as operator of the facility
for a quarterly fee based upon the amount of synthetic fuel produced and sold
per year. Covol cannot predict with any certainty the amount of fees that may be
generated under its operating agreement.
Covol has contracts with independent operators to operate Covol's
Commonwealth Synfuel and Mountaineer Synfuel facilities. River Hill Coal Company
operates the Commonwealth facility and Savage Industries Inc. operates the
Mountaineer facility. Both operating contracts compensate the operator with a
prescribed fee plus reimbursement of costs.
Supply of Raw Materials
The synthetic fuel manufacturing facilities use coal fines as the primary
feedstock to produce synthetic fuel. Accordingly, a supply of coal fines is
essential to the feasibility of a synthetic fuel manufacturing facility.
Historically, lower quality coal and mining refuse and fine particles of
coal were discarded into refuse piles or impoundments. Today, coal preparation
and material handling technologies have reduced the amount of coal that is
discarded, but coal fines generated by coal mining and preparation are still
problematic for the industry. With some variation, most consumers of coal only
purchase coal with an ash content of 12% or less. Discarded coal fines are
typically too high in ash content to be used as-is in making marketable
synthetic fuel. To make use of fine coal refuse, owners of synthetic fuel plants
must either blend the refuse with "clean" coal in appropriate proportions to
yield an acceptable ash content, and/or clean the coal refuse itself. Clean coal
can be purchased from traditional coal marketers and is available to all
synthetic fuel facility owners that have a clean coal/coal refuse blending
strategy. Covol's strategy at all of the facilities it owns or operates includes
clean coal/coal refuse blending.
Coal fines cleaning is a distinct technology and to implement it
successfully requires analysis of the particular coal refuse to determine
appropriate plant design and to determine whether feedstock can be economically
produced. Capital requirements for coal cleaning or preparation plants adequate
to supply a synthetic fuel plant can
12
<PAGE>
be in excess of $4 million. Coal cleaning plants require six months or more to
design and construct. A feasibility analysis must be performed to determine
whether the savings achieved by the plant justify the capital costs of
construction together with operational costs, which can vary between
approximately $5-10 per ton. The costs of a cleaning plant are compared to the
alternative of purchasing clean coal for blending. The decision to construct a
coal cleaning plant does not delay delivery of synthetic fuel to market because
in all cases clean blending coal is available to purchase as an immediate
alternative. The decision to construct a coal cleaning plant is based on how a
facility most economically obtains clean feedstock. Covol constructed a coal
cleaning plant to supply Utah Synfuel #1 and Carbon Synfuel and is reviewing the
feasibility of coal cleaning plants at two other synthetic fuel facilities.
In facilities owned and operated by licensees, the licensee secures its own
supply of coal fines. Licensees that are also coal producers utilize their own
feedstock sources. Nonproducer licensees secure deposits of coal fines to supply
their facilities. Covol has arranged for the supply of coal fines for the
following facilities it owns or operates:
Utah Synfuel #1 and Carbon Synfuel. In February 1997, Covol entered into a
contract with a non-affiliated party, Earthco, to acquire coal fines and to
lease property to conduct fines recovery and preparation activities at a
location near Wellington, Utah, approximately six miles from the Utah Synfuel
plant site. Covol paid an initial amount to Earthco upon execution of the lease
agreement to acquire the fines and lease the associated land and will continue
to make quarterly payments through May 2000. Covol constructed a preparation
plant at the site which became operational in May 1998 and which produces
feedstock from the acquired raw fines for the Utah Synfuel #1 and Carbon Synfuel
facilities. The estimated quantity of coal fines at this site is in excess of 2
million tons although the recoverable amount may be less. Additional fines will
be required to supply the longer term requirements of Utah Synfuel #1 and Carbon
Synfuel.
Pocahontas Synfuel. In May 1997, Covol entered into a joint venture with
Black Diamond Enterprises, Inc. under which Black Diamond has certain rights to
market the synthetic fuel produced at the facility and to a percentage of the
net proceeds received by Covol from the project. In addition, Black Diamond is
to provide coal fines to the Pocahontas Synfuel facility. Black Diamond owns the
land in McDowell County, West Virginia upon which the Pocahontas facility is
located and which land includes a fines pond and other coal refuse containing an
estimated 1.2 million tons of recoverable clean fines. Black Diamond and Covol
plan to construct a preparation plant to clean the raw Black Diamond fines. To
date, neither Covol nor Black Diamond have begun construction of a preparation
plant. In addition to the fines at the Pocahontas site, an affiliate of Black
Diamond operates a waste coal recovery operation with an estimated 350,000 tons
of recoverable clean fines. Covol has also acquired waste coal on a site near
the project with an estimated 500,000 tons of recoverable clean fines. After
cleaning, the coal fines from these reserves are high in recoverable heat, low
in ash, and low in sulfur. Until a preparation plant can be permitted, financed
and constructed at Pocahontas, Covol is purchasing coal fines from local sources
for processing at the facility.
Commonwealth. The Commonwealth Synfuel facility is located on property
owned by River Hill Coal Company, Inc. River Hill has approximately 6 million
tons of leased and permitted coal reserves which it actively mines. River Hill
has agreed to provide up to 400,000 tons per year of coal fines from its mining
and preparation plant operations to the Commonwealth facility. Covol intends to
assign this supply agreement to the entity that acquires this facility, which is
currently being offered for sale.
Mountaineer. The Mountaineer Synfuel facility is located on property owned
by Upshur Property, Inc., an affiliate of Anker Energy Corporation. Anker has
agreed to provide the feedstock requirements of Mountaineer Synfuel, L.C. for a
period of ten years, up to 480,000 tons of feedstock per year. Anker will supply
the feedstock from various sources owned or controlled by Anker, including
preparation plant operations and fines ponds. The price for the feedstock varies
based upon the source of the coal fines and the costs of recovery. The site
contains a fines refuse pond which is serving as a partial source for feedstock
and a preparation plant is planned to increase the quality and amount of
feedstock coming from the site refuse pond. Covol does not yet have financing
for the preparation plant. If Mountaineer Synfuel, L.L.C. exercises its option
to purchase the Mountaineer facility, Covol proposes to assign this supply
agreement to Mountaineer.
13
<PAGE>
Alabama Inventory. In March of 1997 Covol entered into a coal fines supply
agreement (the Supply Agreement") with K-Lee Processing Inc. and Concord Coal
Recovery Limited Partnership (collectively "K-Lee"). Covol purchased coal fines
under the Supply Agreement through February of 1998 at which time Covol sold its
inventory of coal fines and assigned the Supply Agreement to Birmingham Syn
Fuel, L.L.C. Birmingham Syn Fuel removed the coal fines inventory and asserted
that the inventory was approximately 11,000 tons less than K-Lee had invoiced
and received payment from Covol. Covol is currently in negotiations attempting
to resolve the dispute.
Supply of Binder. Covol purchases its patented and proprietary binder from
Dow Chemical Company under a ten year agreement under which Covol pays a
prescribed price per pound of binder. Covol arranges with Dow for the delivery
of the binder from Dow's manufacturing plants to each of the synthetic fuel
facilities owned, operated, or licensed by Covol.
Sale of Facilities
Covol and its affiliates have developed and sold or have granted an option
to sell four synthetic fuel facilities. The following is a summary of each
option or sale:
Utah Synfuel #1. On March 10, 1997, Utah Synfuel #1 Ltd., a Delaware
limited partnership in which Covol was at the time a 64% owner and general
partner, sold the Utah synthetic fuel facility for $3.5 million, in the form of
a nonrecourse promissory note bearing interest at 9.6552% per annum and payable
in 44 equal quarterly installments, all in accordance with the Utah Project
Purchase Agreement, dated as of March 7, 1997, between Covol, Utah Synfuel #1
and Coaltech No. 1 L.P. The sale of the Utah facility resulted in a loss of
approximately $581,000 to Utah Synfuel #1. The promissory note is collateralized
by a security interest in the Utah facility, and in the event of a default under
the promissory note, Covol's and Utah Synfuel #1's sole right to recovery is
limited to the Utah facility without recourse against Coaltech.
Covol granted Coaltech a put option to require Covol to purchase the Utah
facility from Coaltech if:
1. all of the Coaltech limited partners are unable to utilize the
federal income tax credits under Section 29 of the tax code,
2. the economic benefits accruing to or experienced by all of the
Coaltech limited partners differ significantly from what was
initially projected, or
3. there is a permanent force majeure or material damage or
destruction of the Utah facility.
If the put option is exercised prior to the third anniversary date of the
facility sale, the option price will be equal to the fair market value of the
limited partnership interests of the optionees on a going concern basis, but in
no event will the option price exceed 50% of the capital contributions made by
the optionees to fund payments due under the promissory note, the Utah License
Agreement and broker fees. If the put option is exercised on or after the third
anniversary date, the option price will be $10 and the optionees will not be
entitled to any other payments.
As part of the sale of the Utah facility, Covol and Utah Synfuel #1 entered
into a Supply and Purchase Agreement with Coaltech. Under the agreement, Covol
agreed to provide coal fines to the Utah facility for processing into synthetic
fuel at an amount equal to Covol's per ton costs, including any wash costs. Utah
Synfuel #1 also agreed to purchase from Coaltech the synthetic fuel produced at
Coaltech's cost plus one dollar per ton. Coaltech has the right to market its
synthetic fuel to a third party, with Utah Synfuel #1 having a right of first
refusal to purchase such synthetic fuel. Covol has incurred a loss each quarter
in connection with this agreement and expects that these losses will continue
into the foreseeable future.
Carbon Synfuel. In connection with the Utah Project Purchase Agreement,
dated March 10, 1997 Covol entered into an option agreement with Coaltech to
sell a second facility, identified as Carbon Synfuel and located at the Utah
Synfuel #1 facility. If Coaltech exercises its option, Covol will sell the
second line of synthetic fuel manufacturing equipment including the building,
binder plant, and other equipment that were not part of the Utah
14
<PAGE>
Synfuel #1 facility sale. The terms of the option provide that Coaltech would
purchase Carbon Synfuel on the same terms as Coaltech's purchase of Utah Synfuel
#1 facility. Covol does not expect the option to be exercised. Covol is actively
seeking an alternative buyer for the Carbon Synfuel facility, however there is
no assurance that a sale will be completed.
Since the Utah Synfuel #1 facility and Carbon Synfuel facility were first
placed in service they have experienced several problems, including inadequate
clean coal fines as feedstock, inadequate end product strength, and inability to
market to end-consumers the synthetic fuel product produced from the feedstock.
Covol continues to improve the synthetic fuel product quality and believes that
the improvements will achieve the results necessary for successful marketing.
Covol also has begun to see some success in marketing the product from these two
facilities to a power plant and an industrial manufacturer. Covol is seeking a
long term purchase commitment from these consumers.
The Utah Synfuel #1 and Carbon Synfuel facility are currently operating at
well below their rated capacity. Covol and its licensee have incurred a loss on
the production of synthetic fuel at the Utah Synfuel #1 and Carbon Synfuel
facilities.
In order to provide coal fines to the Utah Synfuel #1 facility, Covol
entered into a purchase agreement with Earthco to acquire the coal fines located
at Wellington, Utah. The estimated amount of coal fines at the Wellington site
is in excess of 2 million tons. The Wellington fines require washing. Covol has
constructed a wash plant at the Wellington site which supplies coal fines to
Utah Synfuel #1 and Carbon Synfuel. The cost for the plant was approximately $8
million. The financing for the construction of the wash plant was provided in
part by AJG Financial Services, Inc., and is evidenced by a debenture of Covol
to AJG which is collateralized by the wash plant assets. The debenture bears
interest at 6% per annum with principal and interest being due and payable in
October 1999. As additional consideration to AJG for financing the wash plant,
Covol, in October 1997, agreed to grant to AJG warrants to purchase
approximately 430,000 shares of Covol common stock, with fifty percent of the
shares having a purchase price of $10 per share and fifty percent of the shares
having a purchase price of $20 per share. The warrants expire two years from
issuance.
Birmingham Syn Fuel. Alabama Synfuel #1 Ltd., a Delaware limited
partnership in which Covol was at the time a 74% owner and general partner, sold
the Birmingham Syn Fuel/Birmingport facility to Birmingham Syn Fuel, L.L.C., a
wholly-owned subsidiary of PacifiCorp Financial Services, Inc., on March 6,
1998. The purchase price for the Birmingport facility was $6,500,000 payable in
the form of a nonrecourse promissory note collateralized by certain portions of
the Birmingport facility.
Mountaineer Synfuel. On May 5, 1998 Covol entered into a purchase agreement
to sell the Mountaineer synthetic fuel facility to Mountaineer Synfuel, L.L.C.,
a Delaware limited liability company. The agreement is subject to numerous
conditions, including but not limited to, the obtaining of a PLR from the IRS,
and the production of product meeting certain specifications. There is no
assurance that Mountaineer will exercise its option with respect to the purchase
of this facility. Covol also entered into a financing agreement with Mountaineer
to finance up to $9.75 million for project construction and operations working
capital. Covol's obligation to repay the financing will be extinguished if
Mountaineer exercises its purchase option; otherwise, Covol will be required to
repay the loan with ten percent interest in monthly installments of interest
only payments for the months January through June 1999 and monthly installments
thereafter of $350,000 and a balloon payment on June 30, 2000. Covol's
obligation to repay the amounts borrowed is collateralized by the assets of the
project, and income streams from the Ginger Hill and Pleasant Ridge facilities.
Under a license agreement, Covol will provide use of its technology and
Mountaineer will pay a quarterly license fee based upon the synthetic fuel
product produced and sold during the quarter. Covol will also supply binder
material to the project on a cost plus basis.
In addition to the four facilities discussed above, Covol owns and operates
two synthetic fuel manufacturing facilities that Covol has for sale. One
facility is referred to as Commonwealth Synfuel, located near Karthaus,
Pennsylvania. The other Covol-owned facility for sale is referred to as
Pocahontas Synfuel located near North Fork, West Virginia. Several entities have
expressed interest in purchasing the facilities and Covol expects the facilities
to be sold in early 1999. However, Covol cannot give assurance that it will
successfully sell either or both facilities.
15
<PAGE>
Research and Development
Covol has devoted and continues to commit significant human and capital
resources to the development, refinement and commercialization of the Covol
binder technologies in the engineered fuel and engineered resource applications.
Covol is currently focusing its research and development efforts principally on
the synthetic fuel technology, including refinements to the chemical formula and
process, enhancements to the base binder formulations to address product quality
issues, and continued testing and development of other binder materials for the
production of synthetic fuel. Covol is also currently conducting research and
development related to application of the Covol binder technologies to iron
tailing materials, coke breeze, silicon carbide and other waste product or
resource materials.
Covol's intellectual property base consists of seven U.S. and four
international patents relating to the Covol binder technologies as applied to
coal, iron tailings, coke and other carbon based materials. Covol's research and
development efforts will be directed toward perfecting and expanding these
technologies and the filing for patents for proprietary intangible property
developed. See "ITEM 1. BUSINESS - Proprietary Protection" for a discussion of
Covol's patents, trademarks and other intellectual property.
Proprietary Protection
Covol has the following trade names and patents covering certain aspects of
Covol's technology:
Trade names:
Covol Technologies, Inc., Alabama Synfuel #1 Ltd., Utah Synfuel #1 Ltd.,
Flat Ridge Corporation and Engineered Fuel Technologies, Inc.
Trademarks and Service Marks:
United States Trademark Registration No. 2,038,742 for licensing
services identified by "Covol", "Recycling Yesterday's Waste Into
Tomorrow's Resources."
United States Patents:
United States Patent No. 5,453,103, which issued 26 September 1995.
United States Patent No. 5,487,764, which issued 30 January 1996.
United States Patent No. 5,589,118, which issued 31 December 1996.
United States Patent No. 5,599,361, which issued 4 February 1997.
United States Patent No. 5,738,694, which issued 14 April 1998.
United States Patent No. 5,752,993, which issued 19 May 1998.
United States Patent No. 5,807,420, which issued 15 September 1998.
Foreign Patents:
European Patent Office # 96905442.8-2307 filed May 1, 1998.
Australian #686624 filed on January 21, 1994; filed with U.S. Patent
Office as No. 184099 on May 28, 1998.
New Zealand #266060 filed on April 7, 1994; filed with U.S. Patent
Office on February 20, 1998.
Republic of Trinidad and Tobago #960038 filed on July 1, 1996 and
#970147 filed under PCT/US96/01798 on February 8, 1996.
Other United States, Patent Cooperative Treaty, and Foreign Patent
Applications are pending.
16
<PAGE>
Covol's U.S. and foreign patents expire on January 21, 2014. There can be
no assurance as to the scope of protection afforded by the patents. In addition,
there are other industrial waste recycling technologies in use and others may
subsequently be developed, which do not, or will not utilize processes covered
by the patents or pending patents. There can be no assurance that any patent
issued will not be infringed or challenged by other parties, infringe on patents
held by other parties or that Covol will have the resources to enforce any
proprietary protection afforded by the patent or defend against an infringement
claim.
In addition to patent protection, Covol also relies on trade secrets,
know-how and confidentiality agreements to protect the Covol binder
technologies. However, such methods may not afford complete protection and there
can be no assurance that others will not independently develop such know-how or
obtain access to Covol's know-how, concepts, ideas, and documentation.
Since Covol's proprietary information is important to its business, failure
to protect ownership of its proprietary information would likely have a material
adverse effect on Covol. Covol's current and expected revenues are dependent
upon license agreements by which licensees use the Covol binder technologies to
manufacture synthetic fuel and then pay license fees to Covol. Covol expects
that revenues will continue to be tied to future licensing agreements in the
application of Covol binder technologies to iron rich wastes, coke dust, and
other potentially useful wastes and by-products. Covol believes that its
patents, trade secrets, know-how and confidential information are the basis upon
which Covol is able to obtain licensing agreements.
Confidentiality Provisions
As part of its business, Covol typically enters into agreements concerning
its projects which contain confidentiality provisions. Covol is, on occasion,
required to disclose such agreements to the Securities and Exchange Commission
as part of its ongoing reporting requirements under the Securities Exchange Act
of 1934. In addition, disclosure of such agreements may be required in
connection with Covol's private placement of securities. Some of the agreements
do not contain the standard exceptions for the disclosure of information which
is required to be disclosed under law. Consequently, no assurances can be given
that Covol has not inadvertently disclosed information regarding its various
projects in violation of confidentiality covenants entered into by Covol.
Government Regulation
Covol's and its licensees' synthetic fuel operations are subject to
federal, state and local environmental regulations that impose limitations on
the discharge of pollutants into the air and water and establish standards for
the treatment, storage and disposal of waste products. In order to establish and
operate the synthetic fuel plants, Covol and its licensees obtained various
state and local permits. Covol believes that it or its licensees have obtained
all required permits to construct and operate synthetic fuel facilities, and
that they are in substantial compliance with all relevant laws and regulations
governing the synthetic fuel operations. However, Covol's and its licensees'
synthetic fuel operations entail risk of environmental damage and Covol or its
licensees may incur liabilities in the future arising from the discharge of
pollutants into the environment or from waste disposal practices.
Failure by Covol or its licensees to maintain necessary permits to operate
synthetic fuel plants and to comply with permit requirements could have a
material adverse effect on Covol or its licensees. Other developments, such as
the enactment of more stringent environmental laws and regulations, could
require Covol or its licensees to incur significant capital expenditures. If
Covol or its licensees do not have the financial resources or is otherwise
unable to comply with such laws and regulations, such failure could also have a
material adverse effect on Covol.
Covol's goal is to establish itself as the provider of technologies that
will assist others in the processing and reclamation of their wastes and
by-products, and Covol seeks for itself and its licensees to avoid creating
waste streams or compounding environmental reclamation problems. Covol has not
assumed responsibility for environmental reclamation of coal refuse impoundments
from which Covol or its licensees obtain refuse for feedstock. Such liabilities
are and remain the responsibility of the impoundment owners or operators. In the
manufacture of synthetic fuel from coal refuse using Covol's binder
technologies, the synthetic fuel produced effectively completely consumes the
refuse. The synthetic fuel manufacturing process does not contribute to
environmental reclamation liabilities with respect to the coal refuse. However,
the synthetic fuel manufacturing process using Covol binder technologies
typically uses dilute acids. Covol and its licensees must comply with hazardous
material handling and storage regulations related to acid solutions and stored
concentrates.
Covol's and its licensees' synthetic fuel operations are also subject to
federal and state safety and health standards. Covol is committed to providing
effective management of worker safety and health protection. Covol periodically
contracts with independent safety and industrial hygiene inspectors in order to
measure a facility's regulatory compliance. In addition, Covol has developed a
safety policy designed to raise and maintain a high level of safety awareness by
both management and employees. Compliance to applicable safety and health
standards is verified through periodic inspections by regulatory agencies.
Failure to comply with safety and health standards could have a material adverse
affect on Covol, for example, a regulatory inspector could close the operation
until Covol meets the required standards.
17
<PAGE>
Competition
Products made using the Covol binder technologies compete with other
synthetic products as well as traditional source materials. Competitive factors
include price, quality, delivery cost and waste handling costs. Covol may
experience competition from other alternative fuel technology companies and
their licensees, particularly those companies with technologies to produce coal
based solid synthetic fuels. Competition may come in the form of the licensing
of the competing technologies to process coal fines or in the marketing of end
products qualifying as synthetic fuel. Competition includes, for example,
Carbontec, Krystal Bond, KFx Inc. and Startec Inc. Covol will also experience
competition from traditional coal and fuel suppliers and natural resource
producers in addition to those companies that specialize in the disposal and
recycling of waste products generated by coal, coke, steel and other resource
production. Many of these companies have greater financial, management and other
resources than Covol. Covol believes that it will be able to compete effectively
although there can be no assurance that it will do so successfully.
Employees
Covol currently employs approximately 80 persons full-time. Approximately
30 of such persons are in corporate administration including research,
development and marketing, and 50 are in synthetic fuel and coal washing
operations. None of these employees are covered by a collective bargaining
agreement.
Forward Looking Statements
Statements regarding Covol's expectations as to the financing, development,
construction and operation of facilities utilizing the Covol binder
technologies, the marketing of products, the receipt of licensing fees and other
information presented in this Annual Report on Form 10-K that are not purely
historical by nature, including those statements regarding Covol's future
business plans, the operation 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 Covol 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 Covol's industry or the coal industry or the economy generally,
factors which could cause actual results to differ from expectations stated in
these forward looking statements include, among others, the following:
(1) The commercial success of the Covol binder technologies.
(2) Procurement of necessary equipment to maintain facilities'
operations.
(3) Securing of necessary sites, including permits and raw materials,
for facilities to be constructed and operated.
(4) Completion of facilities, in particular the synthetic fuel
manufacturing facilities, by the placed in service date.
(5) Ability to obtain needed additional capital on terms acceptable
to Covol.
(6) Changes in governmental regulations or failure to comply with
existing regulations which may result in operational shutdowns of
Covol or licensee facilities.
(7) The availability of tax credits under Section 29 of the tax code.
(8) The commercial feasibility of the Covol binder technologies upon
the expiration of Section 29 tax credits.
(9) Ability to meet financial commitments under existing contractual
arrangements.
(10) Ability to commercialize the non-synthetic fuel related Covol
binder technologies which have only been tested in the laboratory
and not in full-scale operations.
(11) Dependence on licensees to successfully implement Covol binder
technologies.
(12) The market acceptance of products manufactured with Covol binder
technologies in the face of competition from traditional products.
(13) Ability to produce products with Covol binder technologies with
acceptable hardness, moisture level, and other characteristics.
(14) Success in the face of competition by others producing synthetic
fuel and other recycled products.
(15) Sufficiency of intellectual property protections.
ITEM 2. PROPERTIES
Covol leases an approximately 5,000 square-foot building in Lehi, Utah,
which houses its executive offices ("Corporate Headquarters"). In August 1997,
Covol entered into a triple-net lease dated August 1, 1997 (the "Headquarters
Lease"). The Headquarters Lease provides for a monthly rent of $5,000 during the
initial term which expires on July 31, 2000. Thereafter, the Headquarters Lease
will automatically extend indefinitely for successive one-year periods at the
sole option of Covol, and the monthly rent will increase by 5% per year.
18
<PAGE>
In October 1997, Covol purchased an 8,000 square-foot site located in
Price, Utah, on which Covol's prototype briquetting plant is located, for
$150,000. Included in the purchase was a 1,400 square-foot office and warehouse
building which houses equipment. The property is subject to a 10-year $100,000
mortgage held by the seller. The equity in the property was pledged as part of
the collateral for a $2.9 million loan to Covol from AJG Financial Services,
Inc.
In May 1995, Covol entered into a lease with Geneva Steel Company for a
9,000 square foot building in Vineyard, Utah. Covol pays no cash rent on these
facilities. Subsequent to the execution of the Geneva Agreements, the lease with
Geneva expired resulting in a tenancy-at-will between the parties. Covol may use
the Geneva briquetting facility in the manufacture of synthetic fuel or for
testing purposes at the Geneva site or some other location.
In June 1996, Covol entered into a land lease of approximately 12 acres in
Price, Utah with a non-affiliated party at a monthly rental of $600. The lease
term commenced on June 20, 1996 and expires on December 31, 2007 but may be
extended. In 1996 Covol constructed a 22,000 square-foot building to house the
Utah Synfuel #1 and Carbon Synfuel facilities. In March 1997, this building was
subleased by Covol to Coaltech as part of the sale of the Utah Synfuel #1
facility. However, Covol retained responsibility for operations of the property
pursuant to an Operations and Maintenance Agreement between Covol and Coaltech.
Covol has constructed an ancillary building, a 1,650 square-foot binder plant.
Coaltech has an option to purchase the Carbon Synfuel facility, and if
exercised, Coaltech will take ownership of the buildings.
In February 1997, Covol entered into a lease agreement with Earthco for two
contiguous parcels located in Wellington, Utah (approximately 6 miles from the
Utah Synfuel #1 site). The first parcel covers approximately 30 acres and has a
lease term of 15 years. On this parcel, Covol constructed a 3,400 square-foot
wash plant. The second parcel covers approximately 357 acres and has a lease
term of 5 years. On this parcel, Covol conducts fines recovery operations. Covol
has the option to extend or purchase either or both parcels upon the
satisfaction of certain conditions. Total obligations to lease the parcels and
acquire the associated fines are approximately $5.5 million, of which $700,000
was paid at the time of lease execution and Covol has and will make payments 4
times each year until May of 2002 for the balance.
In 1997, Covol entered into a 5 year, $850 per month sublease with
Combustion Resources, Inc. for approximately 2,400 square feet of building space
in Provo, Utah.
In 1997, Covol entered into a one year, $9,000 lease with Stephen Mallory
for approximately 2,000 square feet of office and residential space in Dunbar,
West Virginia. This property serves as Covol's Eastern Region office.
In 1998, Covol entered into a one year, $1,500 per month lease with Mobile
Auto & Storage for approximately 4,000 square feet of building space in Lehi,
Utah. This property provides office and laboratory facilities for some of
Covol's research and development personnel.
In May 1998, Covol entered into a 10 year, $1,000 per year lease with
Upshur Property, Inc., for approximately 10 acres of property in Tallmansville,
Upshur County, West Virginia. The property is the site of the Mountaineer
Synfuel facility. The lease is assignable to Mountaineer Synfuel, L.L.C., in
connection with its facility purchase option.
In May 1998, Covol purchased approximately 80 acres of undeveloped property
near Sunnyside, Utah for $100,000. In June of 1998 Covol entered into a five
year lease with an option to purchase approximately 40 acres of property with
office and warehouse improvements. The lease payments are $2,000 per month,
escalating to $3,500 per month over time. The leased property is adjacent to the
purchased property. Covol plans to conduct some operations on the two properties
in the future.
None of Covol's subsidiaries have interests in real property.
ITEM 3. LEGAL PROCEEDINGS
Asbestos Investigation. In January 1996, a manager of Covol entered
property owned by Nevada Electric Investment Company, a subsidiary of Nevada
Power Corporation, in connection with an offer by Covol to purchase the
property, and with certain other employees of Covol, removed some asbestos over
a two-day period. In May of 1996 Covol received a notice of violation and order
for compliance from the State of Utah, Division of Air Quality alleging that
asbestos was improperly handled, removed, and disposed of. Covol complied with
the order and in September of 1996 entered into a settlement agreement with the
State of Utah and paid a fine in the amount of $11,000. In late 1997 the U.S.
Environmental Protection Agency began its own investigation, referring the
matter to the U.S. Attorney's office which proceeded with a grand jury inquiry.
Covol was served in September 1998 with a grand jury subpoena for records, with
which Covol has complied. Covol does not know the results of the grand jury
inquiry or whether the inquiry is completed. Covol does not believe that its
resolution will have a material adverse effect on Covol.
19
<PAGE>
Indemnification to Centerline. In December 1996, Covol entered into six
indemnification agreements with Centerline whereby Covol agreed to indemnify
Centerline should it be required to pay liquidated damages to PacifiCorp under
various design and construction agreements for six synthetic fuel facilities.
Under the original terms of the various design and construction agreements, if
the facilities were not completed by June 1, 1998 then $750,000 in liquidated
damages for each facility would be due and payable by Centerline. The
indemnification agreement only applied if PacifiCorp actually decided to build
the facilities with Centerline as the design/builder. PacifiCorp elected to not
build three of the projects, and therefore the indemnity agreement with respect
to those facilities no longer applies. Accordingly, the maximum amount of
contingent liability to Covol under the indemnification agreements is $2,250,000
($750,000 per design and construction agreement). Counsel for Centerline has
notified Covol that a dispute exists between Centerline and PacifiCorp which may
require indemnification by Covol. Covol has been advised that the dispute is
proceeding to arbitration.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Covol held its Annual Meeting of Stockholders on August 27, 1998. At the
meeting, the following actions were approved by the stockholders:
James A. Herickhoff was elected a director of Covol for a three year term
to expire in 2001, by a vote of 7,703,272 in favor and 50,992 against.
John P. Hill was elected a director of Covol for a three year term to
expire in 2001, by a vote of 7,694,872 in favor and 58,992 against.
Selection by the Board of Directors of PricewaterhouseCoopers LLP as
independent auditors of Covol for the 1998 fiscal year was ratified by a vote of
7,690,463 in favor, 15,610 opposed and 43,938 abstaining.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION
Brent M. Cook 38 Chief Executive Officer and Director
Stanley M. Kimball 44 President and Director
Steven G. Stewart 50 Chief Financial Officer
George W. Ford, Jr. 53 Principal Scientist and Vice President
of Science and Technology
Steven R. Brown 40 Senior Vice President of Engineering
and Development
Max E. Sorenson 49 Senior Vice President of Engineered
Resources
Dee J. ("D.J.") Priano 53 Senior Vice President of Synfuel
Engineered Fuels
Asael T. Sorensen, Jr. 44 Secretary and Corporate Counsel
Harlan M. Hatfield 38 Vice President and General Counsel
Kenneth R. Frailey 45 Vice President of Operations
Stephanie R. Black 36 Vice President of Research and
Development
20
<PAGE>
Brent M. Cook has served as Chief Executive Officer and Director since November
1996, as President from October 1996 until July 1998, and served as Chief
Financial Officer from June 1996 until December 1996. Mr. Cook is a Certified
Public Accountant. Prior to joining Covol, Mr. Cook was Director of Strategic
Accounts-Utah Operations, for PacifiCorp, Inc. ("PacifiCorp"). His
responsibilities included the management of revenues of approximately $128
million per year, and seeking out and evaluating strategic growth opportunities
for PacifiCorp, including joint ventures and other transactions. Mr. Cook spent
more than 12 years with PacifiCorp.
Stanley M. Kimball was appointed President in July 1998 and has been a Director
since January 1997. He served as Chief Financial Officer from January 1997 to
July 1998. Prior to joining Covol, Mr. Kimball was employed by Huntsman
Corporation ("HC"). From 1989 to early 1995, Mr. Kimball served as the Director
of Tax for Huntsman Chemical Corporation ("HCC"). In May 1995, Mr. Kimball was
appointed as an officer of HCC, serving as Vice President, Tax. In July 1995,
Mr. Kimball was appointed as Vice President, Administration for HC. In this
position, he had numerous responsibilities, both for HC and for Mr. Jon M.
Huntsman personally, which included financial accounting, tax and estate
planning, and cash and investment management. In this position, Mr. Kimball also
served as Mr. Huntsman's Chief of Staff. In 1980, Mr. Kimball received a Master
of Accountancy, with emphasis in taxation, from Brigham Young University and is
a Certified Public Accountant. Between 1980 and 1989, he was employed by Arthur
Andersen & Co., and was serving as a Senior Tax Manager prior to his employment
with HCC.
Steven G. Stewart was appointed Chief Financial Officer of Covol in July 1998,
and served as Vice President of Finance and Treasurer from April 1998 through
July 1998. Prior to joining Covol, Mr. Stewart was a partner for 11 years with a
"Big Five" accounting firm, an audit partner with Ernst & Young (formerly Arthur
Young) and was the Salt Lake City office Director of High Technology and
Entrepreneurial Services. From January 1994 through September 1996, Mr. Stewart
was self-employed and provided consulting services to high technology companies,
established strategic alliances, advised companies on alternative valuation
methods applicable to acquisition targets and negotiated acquisition/sale
transactions. From October 1996 through March 1998, Mr. Stewart was a business
assurance partner at PricewaterhouseCoopers, LLP (formerly Coopers & Lybrand
LLP), with primary responsibility for public companies operating in the high
technology, mining and extractive industries. Mr. Stewart is a Certified Public
Accountant.
George W. Ford, Jr. has served as Vice President of Research and Development of
Covol since August 1993. From August 1993 to February 1997, Mr. Ford served as a
Director of Covol. From 1982 to 1993, Mr. Ford was employed at Ballard Medical
Products, Inc. in research and development, principally in the biomedical field.
Mr. Ford holds 17 national and international patents covering a wide variety of
technologies. Mr. Ford has functioned as an independent consultant working on
projects in computer programming, medical product device design and process
polymer chemistry design for the energy industry. Mr. Ford is a member of the
American Association for the Advancement of Science and the Iron and Steel
Society.
Steven R. Brown was appointed Senior Vice President of Engineering and
Development in December 1998. Since July 1998 he served as Vice President -
Synfuel Operations. Previously he served as Vice President of Engineering and
Construction of Covol since February 1995. Mr. Brown served as a Director of
Covol from September 1995 to March 1997. From 1993 to 1995, Mr. Brown was
President of Construction Management Service, Inc. Mr. Brown is a licensed
professional engineer and a licensed general contractor.
Max E. Sorenson was appointed Senior Vice President of Engineered Resources in
December 1998. He served as Vice President of Covol since April 1997. Prior to
Mr. Sorenson's employment with Covol, Mr. Sorenson was Senior Vice President of
Operations, Engineering and Technology of Geneva Steel Company. Mr. Sorenson
began his employment with Geneva Steel Company in October 1989. During his
employment with Geneva Steel Company, Mr. Sorenson also had responsibility for
raw materials, transportation contracts and information systems and also served
as Chief Engineer of Coke, Iron and Steel, and Vice President of Engineering.
Prior to joining Geneva Steel Company, Mr. Sorenson worked for 16 years for
Inland Steel, Inc., one of the largest steel companies in the United States,
where he served in various operational and technology management positions in
ironmaking and steelmaking. Mr. Sorenson obtained a B.S. degree in Metallurgical
Engineering from the University of Utah in 1973 and a Master of Science degree
in Industrial Management from Purdue University in 1978.
21
<PAGE>
Dee J. "DJ" Priano was appointed Senior Vice President of Synfuel Engineered
Fuels in December 1998. Prior thereto, he served as Vice President of Covol
since August 1997. Mr. Priano had been employed by Kennecott Corporation for
more than 32 years prior to that time. Mr. Priano worked in several different
positions at Kennecott including Principal Planning Engineer for Kennecott's
Bingham Canyon mine, Manager of Operations Analysis, Controller of Kennecott's
Bingham Canyon mine as well as the Controller of Kennecott's U.S. Mines
Division. In addition to managing general accounting and financial reporting
activities, he was responsible for the administration of purchasing, MIS and
land and water management functions. Mr. Priano received a BS degree and Master
of Business Administration from the University of Utah.
Asael T. Sorensen, Jr. joined Covol as its legal Counsel in September 1995. He
has also served as Corporate Secretary since June 1996. From 1982 to 1995, Mr.
Sorensen was an in-house attorney for the Church of Jesus Christ of Latter-Day
Saints in Salt Lake City, Utah and practiced law primarily in the area of
contract negotiations and administration. Mr. Sorensen graduated from Brigham
Young University with a joint Juris Doctor and Master of Business
Administration. He is admitted to practice law in the State of Utah.
Harlan M. Hatfield has served as Vice President and General Counsel since July
1998 and Corporate Counsel since October 1996. His primary activities with Covol
have been the development of synthetic fuel projects, including licensing,
financing, permitting, construction, feedstocks, site selection, and other
aspects of project development. As General Counsel he oversees the legal staff
and outside legal counsel, litigation, regulatory disputes, contracts, and other
legal matters. Prior to his employment with Covol, he was in private practice at
the Seattle law firm of Oles, Morrison and Rinker for more than nine years where
he was a partner.
Kenneth R. Frailey joined Covol in August 1998, and in December 1998, was
appointed Vice President of Operations. Until August 1998, Mr. Frailey was
employed by Kennecott Corporation and General Electric for a total of
approximately 20 years. Mr. Frailey's Kennecott experience related to mining and
electrical power generation, and particularly managerial assignments in plant
operations and engineering.
Stephanie E. Black joined Covol in March of 1998 as Director of Research and
Development, and in December 1998, was appointed Vice President of Research and
Development. She was employed as a Strategic Account Manager with PacifiCorp
from June of 1995 until joining Covol. For the approximately 11 years prior to
June 1995, Ms. Black was employed with Hercules, Inc. (now Alliant Techsystems).
While with Hercules, Ms. Black acted at various times as engineer, analyst,
supervisor, and subcontract manager.
Covol's Executive Officers are elected annually by the Board of Directors
and serve at the discretion of the Board.
22
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The shares of common stock of Covol trade on The Nasdaq National(R) Market
under the symbol "CVOL".
The following table sets forth, for the periods presented, the high and low
trading prices of Covol's common stock as reported by Nasdaq from April 1998, to
September 1998, and bid quotations as reported by National Quotation Bureau,
Inc. from October 1996 through March 1998. The quotations do not reflect
adjustments for retail mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions. Since Covol has several market
makers, the bid prices among the different market makers will generally vary.
Accordingly, the bid price may not be representative of actual trades. The
following prices may not be considered valid indications of market value due to
the limited and sporadic trading in the shares of common stock.
Low High
Fiscal 1997
Quarter ended December 31, 1996 $7.50 $14.38
Quarter ended March 31, 1997 7.88 15.75
Quarter ended June 30, 1997 6.75 8.88
Quarter ended September 30, 1997 6.25 10.13
Fiscal 1998
Quarter ended December 31, 1997 $8.88 $13.94
Quarter ended March 31, 1998 10.50 14.06
Quarter ended June 30, 1998 12.25 17.44
Quarter ended September 30, 1998 9.00 17.25
As of December 17, 1998, there were approximately 625 shareholders of
record of Covol's common stock.
Covol has not paid dividends on its common stock to date and does not
intend to pay dividends on its common stock in the foreseeable future. Covol
intends to retain earnings, if any, to finance the development and expansion of
its business and to pay debt service and dividends on preferred stock. Payment
of common stock dividends in the future will depend, among other things, upon
Covol's ability to generate earnings, its need for capital and its overall
financial condition.
Recent Sales of Unregistered Securities
The following sets forth all securities issued by Covol within the past
fiscal year without registration under the Securities Act of 1933, as amended.
No underwriters were involved in any stock issuances nor were any commissions
paid in connection therewith. However, Covol did pay finders fees in the form of
cash, stock or warrants in connection with various securities issuances.
The issuance of qualified options is required to be based on market
value. Accordingly, the exercise price is set based on the market price of
Covol's common stock, even though the options convert into restricted stock.
Covol believes that the following issuances of shares of common stock,
notes, debentures and other securities were exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to the
exemption set forth in Section 4(2) thereof. Each security was issued subject to
transfer restrictions. Each certificate for each security bears a restricted
legend. Each investor made representations to Covol that it was accredited as
that term is defined in Regulation D and that the security was acquired for
investment purposes.
In September and October 1997, Covol accepted subscriptions from 49
accredited investors for the purchase of 119,557 units (the "Units") pursuant to
a Confidential Private Placement Memorandum, dated August 28, 1997 (the
"Memorandum"), at a price of $35.00 per Unit, with an aggregate purchase price
of approximately
23
<PAGE>
$4,200,000. Each Unit consisted of five shares of common stock of Covol together
with a warrant to purchase one additional share of common stock at the price of
$8.00, expiring April 30, 1998. Pursuant to the terms of the Memorandum, Covol
granted to purchasers of the Units piggyback registration rights on the shares
of common stock included in the Units and the shares of common stock which were
issuable upon the exercise of the warrants. A total of 597,850 shares of common
stock and 119,557 warrants were issued in the offering. Of the 119,557 warrants
issued to investors, 96,357 were exercised and 23,300 expired. In connection
with the sale of the Units under the Memorandum, Covol issued to three
accredited investors finder fees in the form of warrants to acquire an aggregate
of up to 199,262 shares of Covol's common stock at a purchase price of $8.00 per
share at any time prior to October 31, 1999, none of which had been exercised as
of September 30, 1998.
On November 25, 1997, Covol issued 1,500 shares of Covol common stock
to a single investor upon exercise of warrants at $8.00 per share, paid in cash.
The warrants were originally issued with Units privately placed in September and
October 1997.
On December 8, 1997, Covol issued 1,500 shares of Covol common stock to
a single investor upon exercise of warrants at $8.00 per share, paid in cash.
The warrants were originally issued with Units privately placed in September and
October 1997.
On January 9, 1998 Covol issued warrants for 216,272 shares of Covol
common stock at a per share exercise price of $10.00 to AJG Financial Services,
Inc. ("AJG"). Also, on January 9, 1998 Covol issued warrants for 216,272 shares
of Covol common stock at a per share exercise price of $20.00 to AJG. Covol
issued these warrants as partial consideration for AJG's loan to Covol of
$4,367,351 under Covol's debenture to AJG dated January 9, 1998.
On March 4, 1998 Covol issued 1,000,000 shares of Covol common stock to
PacifiCorp Financial Services, Inc., pursuant to PacifiCorp Financial's
conversion of its Convertible Loan and Security Agreement dated March 20, 1997
("Agreement"). On April 7, 1998 Covol issued an additional 27,000 shares of
Covol common stock to PacifiCorp Financial as satisfaction of the adjustment
provisions of the Agreement.
In 1996, Covol formed two limited partnerships, Alabama Synfuel #1 Ltd.
and Utah Synfuel #1 Ltd., to assist with the financing of construction at two
synthetic fuel manufacturing facilities. These two facilities have been sold and
are now owned by Birmingham Syn Fuel, L.L.C. and Coaltech No. 1 L.P. On
September 9, 1998 Covol offered the limited partners in Utah Synfuel #1 and
Alabama Synfuel #1 an exchange of Covol's common stock for their limited
partnership interests. The exchange ratio was based in part on an independent
valuation of the limited partnership's assets and other factors including but
not limited to current and future expected cash flow of the partnerships and
current market values of Covol's common stock as quoted on NASDAQ. The exchange
ratio for Utah Synfuel #1 was 112.828 shares of common stock per each limited
partnership unit and 125.97 shares for each Alabama Synfuel #1 limited
partnership unit. The limited partnership's units originally sold for $1,000 per
unit.
As of November 10, 1998, all of the limited partners in Utah Synfuel #1
and all but one of the limited partners in Alabama Synfuel #1 had agreed to
exchange their limited partnership interests for shares of Covol's Common Stock,
and accordingly Utah Synfuel #1 became a wholly-owned subsidiary of Covol and
Alabama Synfuel #1 became a 98%-owned subsidiary of Covol.
During September 1998 Covol completed a financing of $1,500,000 that
consisted of the sale of 55,555 units at $27.00 per unit to an investor. A unit
consisted of three shares of restricted common stock of Covol plus one warrant
to purchase one share of restricted common stock at a price of $12.00. The
warrants expire September 16, 2000 if not exercised.
During November 1998, Covol completed a financing transaction that
consisted of $400,000 of debt and approximately $3,500,000 of equity issued to
28 investors. The debt had a term of twelve months, bears interest at 15% per
annum, with an interest only payment due in six months and with the balance of
interest and principal due at maturity. The debt is collateralized by certain
assets of Covol and is due prior to maturity upon the placement of
24
<PAGE>
long-term financing by Covol. The equity transaction consisted of the sale of a
unit at a price of $5.00. A unit consisted of one share of restricted common
stock of Covol plus a warrant to purchase one additional share of restricted
common stock at an exercise price of $7.50. The warrants expire in twelve months
if not exercised. The stock and shares issuable pursuant to the related warrants
bear "piggyback" registration rights.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from the consolidated
financial statements of Covol. This information should be read in conjunction
with the consolidated financial statements, related notes and other financial
information included herein. As more fully described in Note 15 to the
consolidated financial statements, Covol sold its construction subsidiaries in
1996. All construction - related operations have been reflected as discontinued
operations in the 1996, 1995 and 1994 financial statements. The construction
subsidiaries include one business which was acquired on September 30, 1994 and
therefore is included in discontinued operations in 1996 and 1995 only. The note
receivable received by Covol as consideration for the sale is "marked to market"
each quarter based on the market value of Covol's stock held as collateral, and
the resulting adjustments are reflected in Covol's statement of operations. The
selected financial data as of and for the nine months ended September 30, 1994,
as of and for the year ended September 30, 1995 and as of September 30, 1996 are
derived from audited financial statements not included herein. The selected
financial data for the year ended September 30, 1996, and as of and for the
years ended September 30, 1997 and 1998 were derived from the financial
statements of Covol which have been audited by PricewaterhouseCoopers LLP
included elsewhere herein.
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended September 30, September 30,
---------------------------------------------------
(thousands of dollars, except per-share data) 1998 1997 1996 1995 1994
- ----------------------------------------------- ------------ --------------- --------------- -------------- -------------
OPERATING DATA:
<S> <C> <C> <C> <C> <C>
Total revenues $12,699 $ 251 $ 295 $ 129 $ 20
Loss from continuing operations (3,986) (10,995) (12,955) (4,524) (498)
Net loss (3,986) (10,995) (13,836) (5,654) (143)
Basic and diluted net income (loss)
per common share:
Loss per share from continuing
operations (.43) (1.38) (1.86) (1.00) (.13)
Net income (loss) per share (.43) (1.38) (1.99) (1.25) 0.04
Purchase of property, plant and
equipment and facilities
held for sale 36,963 7,194 5,055 694 100
<CAPTION>
September 30,
------------------------------------------------------------------------
(thousands of dollars) 1998 1997 1996 1995 1994
- ------------------------------------------------ ----------- --------------- --------------- -------------- ------------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Working capital $ 8,549 $ 4,960 $(3,482) $ (480) $ (620)
Net property, plant and equipment 14,902 5,464 7,125 1,330 748
Total assets 66,897 26,361 8,772 2,660 4,853
Long-term obligations 16,279 5,467 364 177 852
Total stockholders' equity (deficit) 21,571 5,929 (233) 1,183 2,990
</TABLE>
25
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the information set forth under the caption entitled "ITEM 6. SELECTED
FINANCIAL DATA" and the financial statements and notes thereto for Covol
included elsewhere herein.
Year Ended September 30, 1998 Compared to Year Ended September 30, 1997
The information set forth below compares Covol's operating results for
1998 with its operating results for 1997.
Revenues. Total revenues for the year ended September 30, 1998
increased by $12,448,000 to $12,699,000 as compared to $251,000 for 1997. During
1998 Covol recognized license fees totaling $7,942,000 while no license fees
were recognized during 1997. These fees consisted of one-time advance license
fees of $7,736,000 and earned license fees or royalty payments of $206,000.
Advance license fees are normally due when construction of the related synthetic
fuel facility begins, when construction is completed, or when certain
construction milestones or other conditions are met. Covol expects to receive
approximately $4,000,000 of additional advance license fees during 1999 upon the
sale of certain synthetic fuel facilities currently owned by Covol and upon the
achievement of certain production levels at one of the synthetic fuel
facilities. Earned license fees or royalty payments are due quarterly based upon
synthetic fuel produced and sold as reported to Covol by its licensees. Covol
had sales of binder and coal fines to a related party during 1998 totaling
$2,543,000 compared to $209,000 during 1997. These revenues resulted primarily
from coal fines that were sold to the related party at Covol's cost as provided
for under the binder and license agreement with this party. Substantially all of
the fines purchased by Covol have now been sold so sales of coal fines are not
expected to be material during 1999. Covol sold six binder mixing plants to
licensees during 1998 for $1,088,000, generating a gross profit of $200,000.
Covol does not expect sales of binder mixing plants during 1999. Covol provides
binder material to its licensees either at a fixed price or at Covol's cost plus
a contracted markup. Covol purchases the binder materials under a long-term
contract with a large chemical company. Total binder sales during 1998 were
$994,000 with a corresponding direct cost to Covol of $642,000. Covol expects a
significant increase during 1999 of production of synthetic fuel by its
licensees as licensees move toward full production levels with a corresponding
increase in earned license fees or royalty payments and sales of binder
products. However, Covol cannot assure increases in license fees, royalty
payments, and binder sales because Covol licensees must successfully obtain
adequate feedstock coal fines, process fines into synthetic fuel, and develop
markets for synthetic fuel, now and in the future. Covol believes that its
licensees have made significant progress in these areas, but continued success
cannot be assured.
Operating Costs and Expenses. Operating costs and expenses increased by
$4,205,000 or 38% to $15,310,000 during 1998 from $11,105,000 during 1997. Cost
of coal briquetting operations increased $4,492,000 from $4,803,000 during 1997
to $9,295,000 during 1998. This increase included $4,121,000 relating to the
costs associated with binder plant sales, binder sales and coal fine sales as
discussed above. During 1997, Covol recorded an expense for $1,477,000 relating
to construction penalties for failure to proceed under several contracts Covol
had entered into. There was no similar expense in 1998. However, during 1998
Covol incurred significantly higher operating expenses in connection with the
continued refinement and implementation of the briquetting process, and the
commercialization of this process in connection with the 24 facilities placed in
service during 1998, including the four facilities held for sale. Covol expects
to continue incurring losses into 1999 until these facilities are sold. Covol
expects to realize a gain when the facilities are sold. These expenses related
in part to the construction and operation of four synthetic fuel facilities
built by Covol that are currently held for sale, costs incurred in providing
assistance to Covol's licensees during the ramp-up of their synthetic fuel
facilities, and increased personnel costs. These increases during 1998
effectively offset the 1997 construction penalty expenses. Covol operates one of
the synthetic fuel facilities for Coaltech, a partnership for which Covol is the
general partner. Under this operating agreement, Covol is contractually
obligated to purchase all of the synthetic fuel produced at cost plus $1 per
ton. Production of synthetic fuel from this facility during 1998 was not
significant and accordingly, the cost per ton is significantly in excess of the
current market value. These costs and the corresponding write-down of this
inventory
26
<PAGE>
to its market value are included in the cost of coal briquetting operations. The
write-down was approximately $1,400,000 during 1998 and $1,548,000 during 1997.
Covol expects the excess cost per ton to decrease in 1999 as production volumes
increase.
Research and development costs decreased during 1998 as a result of
Covol's continued focus on the commercialization of the synthetic fuel
technology and the utilization of certain research and development resources in
this endeavor. Covol expects that research and development costs will increase
in 1999 as Covol focuses resources on further refinement of its technology
relative to the synthetic fuel / coal industry and the application of the
technology into other areas.
Selling, general and administrative expenses increased $1,438,000 or
48% to $4,436,000 during 1998 from $2,998,000 for 1997. Approximately $500,000
of this increase related to a substantial increase in travel and related costs
as Covol's employees spent a significantly greater amount of time at Covol and
licensee-owned facilities. Covol believes that travel and related expenses will
decrease during 1999, but will continue to run at levels higher than 1997 due to
the ongoing activities that will be required at the 24 synthetic fuel facilities
utilizing Covol's patented technology. The balance of the increase in expenses
relates to approximately $250,000 of commissions incurred in connection with the
placement of synthetic fuel license agreements, $175,000 in increased
professional fees and a $500,000 increase in payroll and related costs,
resulting from additional employees hired.
Compensation expense on stock options, stock warrants, or issuance of
common stock decreased $1,119,000 or 54% to $939,000 for 1998 from $2,058,000
for 1997. This decrease is attributable to a change in policy to only grant
stock options at strike prices that are not "in-the-money", for the purpose of
providing an incentive to the recipient of the options to create shareholder
value. The majority of the 1998 expense relates to options granted in prior
years that vest over several years and the compensation value that is being
recognized as an expense over the vesting period.
In 1998, Covol sold the facility owned by Alabama Synfuel #1 Ltd. for
$6,500,000, in exchange for a note receivable due February 2003. A loss of
$218,000 was incurred from the sale of this facility. In 1997, Utah Synfuel #1
sold its facility to Coaltech for $3,500,000, evidenced by a promissory note
payable in 44 quarterly installments of $130,000 starting March 31, 1997. The
actual cost to construct the Utah Synfuel #1 facility was $4,082,000.
Accordingly, a loss was incurred from the sale of the Utah Synfuel #1 facility
in the amount of $582,000.
During 1996, Covol sold certain construction companies and received as
consideration a $5,000,000 note receivable ("Note") with interest at 6% payable
over five years. It was determined that the Note should be discounted to an
appropriate market rate and accordingly, the Note was discounted at 10.25%
resulting in a discount of $1,281,000. The Note is collateralized by stock and
stock options of Covol and is reflected in the balance sheet at the underlying
value of the collateral. Accordingly, the Note is "marked to market" each
quarter based upon the market value of Covol's common stock. This adjustment
resulted in income of $19,000 being recognized during 1998, compared to an
expense of $60,000 recognized during 1997. The Note is guaranteed by the buyer
of the construction companies and there has been no event of default or past due
payment on the Note. Covol is scheduled to receive a $515,000 payment on the
Note in January 1999. Covol does not accrue interest on this Note and as of
September 30, 1998 the Note has a carrying value of $1,609,000 in Covol's
balance sheet.
Other Income and Expense. During 1998, Covol had net other expenses of
$1,375,000 compared to $141,000 for 1997. This increase of $1,234,000 relates
primarily to an increase of $487,000 in net interest expense and a decrease of
$853,000 in minority interest in the net losses of consolidated subsidiaries
(Utah Synfuel #1 and Alabama Synfuel #1). Interest expense in 1999 is expected
to decrease after the repayment of debt related to facilities held for sale.
During September 1998, Covol offered the limited partners of Utah Synfuel #1 and
Alabama Synfuel #1 an exchange of their limited partnership interests for common
stock of Covol. These exchanges, most of which were accounted for in September
1998, were substantially completed in November 1998, at which time Utah Synfuel
#1 became a wholly-owned subsidiary of Covol and Alabama Synfuel #1 became a
98%-owned subsidiary of Covol. Covol believes the combined operations of these
partnerships will result in operating losses in the near-term future which will
be included in Covol's statement of operations.
27
<PAGE>
Loss from Continuing Operations. For 1998, the loss from continuing
operations decreased by $7,009,000 from $10,995,000 for 1997 to $3,986,000. The
decrease is primarily due to the significant increase in total revenues, which
was partially offset by increased operating costs and other expenses as
discussed previously. Covol did not recognize any income tax benefit in 1998 or
1997 since the realization of its deferred tax assets, consisting primarily of
net operating loss carryforwards, depends on generation of future taxable
income.
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996
The information set forth below compares Covol's operating results for
1997 with its operating results for 1996.
Continuing Operations
Revenues. For 1997, total revenues decreased by $44,000 to $251,000
from $295,000 for 1996. There were no license fees recognized in 1997 as
compared to $100,000 recognized in 1996. Covol received payment for related
party license fees in fiscal 1997 which were attributable to a one-time advance
license fee paid by Coaltech, a partnership for which Covol serves as the
general partner, upon the sale of the Utah Synfuel #1 facility. Covol also
received a $250,000 payment in fiscal 1997 of a one-time advance license fee
from Birmingham Syn Fuel, L.L.C. upon the issuance of a private letter ruling to
Birmingham Syn Fuel by the Internal Revenue Service. Because Covol is obligated
to render future services to Coaltech and Birmingham Syn Fuel, the advance
license fees are recorded as deferred revenue and will be recognized as income
in future periods when its obligations are met. Net proceeds from the sale of
briquettes decreased in 1997 by $153,000 to $42,000 from $195,000 in 1996.
Notwithstanding the Utah Synfuel #1 facility having been placed in service in
early 1997, its production and sales of synthetic fuel were significantly
curtailed due to the lack of adequate quality feed stock for production. Covol
did produce approximately 18,000 tons of synthetic fuel during 1997; however,
due to high levels of ash in the feedstock and hence in the end product, the
synthetic fuel was difficult to market. Covol received revenues from binder
sales in the amount of $209,000 in 1997. No sales of binder were made in 1996.
Operating Costs and Expenses. Operating costs and expenses increased
$532,000 to $11,105,000 for 1997 from $10,573,000 for 1996. Operating costs and
expenses attributable to briquetting operations increased $3,943,000 to
$4,803,000 for 1997 from $860,000 for 1996. On or before December 31, 1996,
Covol entered into several contracts to construct synthetic fuel facilities. In
order for the contracts to be binding for purposes of qualification for Section
29 treatment, Covol agreed to pay a penalty of 6% of the expected contract price
for the facilities if Covol did not proceed with construction. As of September
30, 1997, there were several contracts that were not expected to be completed by
June 30, 1998. Accordingly, Covol recorded the liability for the penalty for
these facilities in 1997 in the amount of $1,477,000. Covol also incurred costs
of $1,548,000 which were attributable to the start-up and operation of the Utah
Synfuel #1 facility for Coaltech, a partnership for which Covol is the general
partner. When Utah Synfuel #1 and Covol sold the Utah Synfuel #1 facility to
Coaltech, Utah Synfuel #1 entered into an agreement to purchase synthetic fuel
produced at the Utah Synfuel #1 facility for costs incurred plus $1 per ton. The
Utah Synfuel #1 facility incurred significant costs for coal fines, labor,
binder materials, repairs and maintenance, equipment rental and other costs to
work through various operational issues. These costs are included in the
synthetic fuel purchase commitment and therefore are included in the cost of
coal briquetting operations. The remaining costs for briquetting operations in
1997 were more than in 1996 due to material and labor costs for the continuing
refinement and implementation of the briquetting process and is reflective of
the phase of commercialization and operation Covol was in for 1997 as compared
to 1996.
Research and development costs decreased $380,000 or 36% during 1997
from $1,044,000 for 1996. This decrease is due to Covol's focus of resources and
efforts on the commercialization of its synthetic fuel technology through: the
construction and start-up of its first full scale briquetting facilities, the
Utah and Birmingport plants; the licensing of the Briquetting Technology to
other licensees; and the development of other projects that will utilize the
Briquetting Technology in the manufacture of synthetic fuels. The majority of
the 1997 costs were principally attributable to research and development efforts
related to Covol's synthetic fuels technology.
28
<PAGE>
Selling, general and administrative expense decreased $798,000 or 21%
to $2,998,000 for 1997 from $3,796,000 for 1996. The decrease related
principally to reductions in costs for administrative labor, outside
professional services and travel expenses. The reduction in these expenses is
due to Covol's use of personnel, resources and efforts on the commercialization
of the Covol binder technologies.
Compensation expense on stock options, stock warrants and issuance of
common stock decreased $2,815,000 or 58% to $2,058,000 for 1997 from $4,873,000
for 1996. The decrease is attributable to reduction in the use of stock options
in compensating employees and consultants of Covol. The reduction is also
reflective of a general change in Covol philosophy regarding the strike price
for options granted. Generally, fewer stock options granted by Covol have been
"in-the-money", thus serving as an incentive to the recipient of the options to
add value to Covol.
In 1997, Utah Synfuel #1 sold its facility to Coaltech for $3,500,000,
evidenced by a promissory note payable in 44 quarterly installments of $130,000
starting March 31, 1997. The actual cost of Utah Synfuel #1 to construct the
facility was $4,082,000. Accordingly, a loss was incurred from the sale of the
Utah Synfuel #1 facility in the amount of $582,000.
Other Income and Expense. In 1996, Covol had net other expense of
$2,654,000 and in 1997 had net other expense of $141,000 for a net decrease in
other expense of $2,513,000. In 1996, Covol was required, under generally
accepted accounting principles, to write down the discounted $5,000,000 6%
promissory note (the "Note") from the sale of the construction companies to the
ascertainable value of the property collateralizing the Note. This accounting
treatment resulted in a write-down of $2,700,000 in 1996. The additional
write-down in 1997 of $60,000 resulted from the change in the value of the
property collateralizing the Note. The Note is guaranteed by the buyer of the
construction companies and there has been no event of default or past due
payment on the Note. The remaining difference in net other expense is made up
principally of interest expense of $1,645,000, of which $1,438,000 was booked as
a result of the transaction Covol entered into with PacifiCorp with respect to
the $5,000,000 convertible debt instrument (see discussion below). This expense
is partially offset by the net change in the addback for minority interest in
net losses of consolidated subsidiaries of $1,241,000 ($4,000 in 1996 compared
to $1,245,000 in 1997). The increase is attributable to the minority interest in
the loss incurred by Utah Synfuel #1 in 1997. The current period represents the
first full year of operations of Utah Synfuel #1. Utah Synfuel #1 incurred
losses in 1997 due to: the sale of the Utah Synfuel #1 facility at an amount
less than its cost (after adjustment for the installation of the new dryer),
start-up costs for the facility, expense incurred for license fees, and the
obligation to purchase synthetic fuels produced at a price equal to cost plus $1
per ton.
In July 1996, Covol negotiated with PacifiCorp the general terms of the
sale of the Birmingport facility, including an arrangement for convertible debt
in the amount of up to $5,000,000 to fund working capital and construction costs
needed to complete the Birmingport facility. At the time of these negotiations,
Covol agreed to a conversion price of $7 per share, the trading price of Covol's
stock at the time the deal was initially negotiated. The actual documents
completing this agreement were not finalized until March 20, 1997, at which time
the bid price of the common stock of Covol was approximately $9 per share.
Notwithstanding the fact that at the time Covol initially negotiated the
conversion price there was no discount, because there was a discount as of the
date the documents for the transaction were completed and signed, Covol was
required to reflect as interest expense the deemed discounted value, the
difference at the date of issue of the convertible debt security between the
conversion price and the fair market value of the common stock into which the
security is convertible, multiplied by the number of shares into which the
security is convertible. The expense did not require an actual cash payment nor
did it impact the net equity of Covol. This accounting treatment is consistent
with guidance issued by the Securities and Exchange Commission and with guidance
issued as of March 13, 1997 by the Emerging Issues Task Force of the AICPA
(Statement EITF D-60: Accounting for the Issuance of Convertible Preferred Stock
and Debt Securities with a Nondetachable Conversion Feature).
Loss from Continuing Operations. For 1997, Covol had a net decrease of
$1,960,000 in loss from continuing operations. The decrease is principally due
to: reductions in research and development costs and selling, general and
administrative costs; reductions in expenses for compensation expense from stock
options, stock warrants and issuance of common stock; and reduction in the
write-down of notes receivable. These reductions
29
<PAGE>
were partially offset by: increases in costs for briquetting operations,
including losses attributable to the Utah Synfuel #1 facility and penalties for
failure to proceed with construction contracts; loss from the sale of the Utah
Synfuel #1 facility, and interest expense booked on the PacifiCorp convertible
debt. Covol did not recognize any income tax benefit in 1997 or 1996 related to
net operating loss carryforwards since the realization of the deferred tax
assets depends on generation of future taxable income.
Discontinued Operations
For 1996, Covol incurred losses from discontinued operations in the
total amount of $881,000. No additional losses were recorded from discontinued
operations in subsequent years.
Liquidity and Capital Resources
Liquidity. During 1998, Covol and its licensees completed the
construction of and began operations at 24 synthetic fuel facilities. Covol
currently owns four facilities which it constructed that are either under option
to purchase or are being offered for sale. Covol anticipates sale of these
facilities during the year ending September 30, 1999. The majority of the funds
received from sale of these facilities will be used to retire debt that was
incurred principally in connection with the construction and operation of these
facilities and activities relative to the completion of the other synthetic fuel
facilities. Net cash used in operating activities increased by $840,000 to
$5,042,000 during 1998 from $4,202,000 during 1997. Covol was able to fund its
operating activities, including the continued refinement and commercialization
of it patented briquetting technology, through the incurrence of debt and the
issuance of convertible preferred stock, common stock and related common stock
warrants.
Capital Resources. During 1998, Covol used net cash in its investing
activities totaling $38,388,000 compared to $7,181,000 for 1997. These uses
consisted principally of purchases of property, plant and equipment, a major
portion of which related to the four facilities currently held for sale. During
1998, proceeds from the issuance of notes payable and convertible debentures
totaled $35,454,000 and issuance of common stock totaled $3,257,000. Covol
believes that funds required for investing activities will be significantly less
during 1999 because the construction of facilities that produce synthetic fuel
that qualifies for federal income tax credits under Section 29 of the IRC were
completed during 1998.
Covol anticipates that earned license fees or royalties from the
production and sale of synthetic fuel will continue to increase during 1999.
Covol believes that most of the synthetic fuel facilities will reach production
levels approaching capacity by the end of 1999. As production levels increase,
sales of the binder materials by Covol to its licensees are expected to increase
proportionately. Covol also anticipates receiving the final amounts of advance
license fees totaling approximately $4,000,000 during 1999. While funds received
by Covol from these activities are not expected to be sufficient to cover
Covol's operating costs and expenses until the third quarter of 1999, Covol does
expect that these operating activities will be producing significant operating
cash flow by the end of 1999.
To provide funding for Covol's operations and debt repayment
requirements during early 1999, Covol will utilize proceeds from the issuance of
debt and equity securities and excess proceeds from the sale of facilities.
During November 1998, Covol issued common stock and common stock warrants for
total proceeds of approximately $3,500,000 and incurred debt totaling $400,000.
Covol has received term sheets for the sale of up to $10,000,000 of convertible
preferred stock. This financing is expected to close in January 1999. Covol has
received correspondence from the lender holding notes payable due March 1999 and
June 1999 indicating a willingness to extend the due dates for 90 days if so
requested by the Company. If such a request is made, Covol has agreed to issue
warrants for the purchase of common stock to the lender as consideration for the
extension. Covol believes the funds raised in this financing will be sufficient
to fund Covol's operations and debt repayment requirements until its operating
activities begin producing positive cash flow.
30
<PAGE>
Forward Looking Statements
Statements in this Item 7 regarding Covol's expectations as to the
financing, development and construction of facilities utilizing Covol's binder
technologies, the receipt of licensing and royalty fees, revenues, the receipt
of operation and maintenance fees, the receipt of fees for sale of binder
materials, and other information presented herein that are not purely historical
by nature, constitute forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Although Covol 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 Covol'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 in part, the
following:
o the ability of licensees to produce and sell synthetic fuel at or near
the rated capacity of the synthetic fuel facilities;
o ability to obtain needed additional capital on terms acceptable to
Covol;
o changes in governmental regulation or failure to comply with existing
regulation which may result in operational shutdowns of its facilities;
and
o the availability of tax credits under Section 29 of the tax code.
See "ITEM 1. BUSINESS--Forward Looking Statements" for a description of
additional factors which could cause actual results to differ from expectations.
Year 2000 Issues
The year 2000 issue results from computer programs and electronic
circuitry that do not differentiate between the year 1900 and year 2000 because
they are written using two-digit rather than four-digit dates to define the
applicable year. Many computer applications and date-sensitive devices could
fail or produce erroneous results when processing data after December 31, 1999.
Covol does not have any computer applications that it believes are
mission critical to the operation of synthetic fuel facilities that it operates.
While Covol has not formally verified Year 2000 compliance with licensees that
utilize Covol's technology in their synthetic fuel facilities, it is believed
that the computer applications used in the operations of these facilities are
not mission critical. Accordingly, it is believed that Year 2000 issues will not
be significant to these computer applications and accordingly, upgrading or
modifications to these applications to make them Year 2000 compliant will not be
significant.
During 1998 Covol upgraded its network operating system and believes
that system is Year 2000 compliant and that any additional upgrading to that
system will not be significant. Covol utilizes computer applications in the
finance and accounting departments and in the corporate office that utilize a
two-digit date that will need to be upgraded in order to be Year 2000 compliant.
Covol has contacted the providers of this software and they have indicated that
Year 2000 compliant software will be available in early 1999. Covol believes the
cost to purchase this upgraded software and to convert the applicable
applications to this new software will be less than $50,000. Covol anticipates
that this conversion will be completed by June 30, 1999. The costs incurred
during 1998 to upgrade the network operating systems was approximately $25,000
and is included in selling, general and administrative expenses.
31
<PAGE>
Impact of Inflation
During 1998, cost increases to Covol were not materially impacted by
inflation.
Other Items
Covol has reviewed all recently issued, but not yet adopted, accounting
standards in order to determine their effects, if any, on the results of
operations or financial position of Covol. Based on that review, Covol believes
that none of these pronouncements will have any significant effects on current
or future financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial data required by
this Item 8 are set forth in Item 14 of this Form 10-K. All information which
has been omitted is either inapplicable or not required.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There are no changes in or disagreements with Accountants on accounting
or financial statement disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information to be set forth under the caption "Item 1: Election of
Directors" in Covol's Proxy Statement dated on or about January 25, 1999, for
the Annual Meeting of Shareholders to be held on or about March 18, 1999 (the
"Proxy Statement"), and the information to be set forth under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement
are incorporated herein by reference. The information set forth under "Executive
Officers of Covol" in Part I hereof is also incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information to be set forth under the caption "Executive
Compensation" in the Proxy Statement is incorporated herein by reference;
provided, however, that Covol specifically excludes from such incorporation by
reference any information set forth under the captions "Compensation Committee
Report on Executive Compensation" and "Stock Price Performance Graph" in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security ownership of certain beneficial owners and management to be
set forth under the caption "Security Ownership of Directors, Nominees and
Principal Stockholders" in the Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information to be set forth under the caption "Transaction with
Related Parties" in the Proxy Statement is incorporated herein by reference.
32
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) 1. Financial Statements
Consolidated Financial Statements of Covol Technologies, Inc.
Report of Independent Accountants...................................... F-1
Consolidated Balance Sheets as of September 30, 1998 and 1997.......... F-2
Consolidated Statements of Operations
for the years ended September 30, 1998, 1997 and 1996......... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended September 30, 1998, 1997 and 1996......... F-5
Consolidated Statements of Cash Flows
for the years ended September 30, 1998, 1997 and 1996......... F-9
Notes to Consolidated Financial Statements............................. F-11
2. Financial Statement Schedules
All financial statement schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and therefore
have been omitted.
3. Listing of Exhibits
Certain other instruments which would otherwise be required to be
listed below have not been so listed because such instruments do not authorize
securities in an amount which exceeds 10% of the total assets of Covol and its
subsidiaries on a consolidated basis and Covol agrees to furnish a copy of any
such instrument to the Commission upon request.
There is included a Restated Financial Data Schedule for the years
ended September 30, 1997 and 1996.
33
<PAGE>
Exhibit No. Description Location
2.1 Agreement and Plan of Reorganization, dated July 1, (1)
1993 between Covol and the
Stockholders of R1001
2.2 Agreement and Plan of Merger dated August 14,
1995 between Covol and Covol (1)
Technologies, Inc., a Delaware corporation
2.3 Stock Purchase Agreement, dated July 1, 1993, (1)
among Covol, Lloyd C. McEwan, Michael McEwan,
Dale F. Minnig and Ted C. Strong regarding the
purchase of Industrial Management & Engineering,
Inc. and Central Industrial Construction, Inc.
2.4 Stock Sale Transaction Documentation, effective (1)
as of September 30, 1994, between Covol and
Farrell F. Larson regarding Larson Limestone
Company, Inc.
2.5 Stock Purchase Agreement dated February 1, 1996 (1)
by and among Covol, Michael McEwan and Gerald
Larson regarding the sale of State, Inc.,
Industrial Engineering & Management, Inc.,
Central Industrial Construction, Inc., and
Larson Limestone Company, Inc.
2.5.1 Amendment to Share Purchase Agreement regarding (1)
the sale of the Construction Companies
2.5.2 Amendment No. 2 to Share Purchase Agreement (2)
regarding the sale of the Construction Companies
3.1 Certificate of Incorporation of Covol (1)
3.1.1 Certificate of Amendment of the Certificate of (1)
Incorporation of Covol dated January 22, 1996
3.1.2 Certificate of Amendment of the Certificate of (6)
Incorporation dated June 25, 1997
3.1.3 Certificate of Designation, Number, Voting Powers, (7)
Preferences and Rights of Covol's Series A 6%
Convertible Preferred Stock (Originally designated
as Exhibit No. 3.1.2)
3.1.4 Certificate of Designation, Number, Voting Powers, (8)
Preferences and Rights of Covol's Series B
Convertible Preferred Stock (Originally designated
as Exhibit No. 3.1.3)
3.2 By-Laws of Covol (1)
3.2.1 Certificate of Amendment to Bylaws of Covol dated
January 31, 1996 (1)
3.2.2 Certificate of Amendment to the Bylaws dated May (6)
20, 1997 (Originally designated as Exhibit No. 3.2.1)
3.2.3 Certificate of Amendment to the Bylaws dated June 25, (6)
1997 (Originally designated as Exhibit No. 3.2.2)
4.1 Promissory Note between Covol and Mountaineer (12)
Synfuel, L.L.C. dated May 5, 1998 (filed as
Exhibit 10.52.2 hereto)
34
<PAGE>
Exhibit No. Description Location
4.2 Promissory Note dated December 8, 1998 of Covol to *
Mountaineer Synfuel, L.L.C.(filed as Exhibit
10.52.4 hereto)
4.3 Security Agreement dated December 8, 1998 between *
Mountaineer Synfuel, L.L.C. and Covol (filed as
Exhibit 10.52.5 hereto)
9.1 Special Powers of Attorney Coupled With an Interest (1)
dated February 1, 1996 between Covol, Gerald Larson
and Michael McEwan
10.1 License Agreement, dated June 30, 1995, between (1)
Covol and Greystone Environmental Technologies,
relating to the Greystone Joint Venture
10.1.1 First Amendment dated January 3, 1996 to the (1)
License Agreement dated June 30, 1995 between
Covol and Greystone Environment Technologies
10.2 Briquetting Services Agreement, dated May 5, 1995, (1)
between Geneva Steel Company and Covol
10.2.1 Amended and Restated Briquetting Service (3)
Agreement, dated May 14, 1996, between Covol
and Geneva Steel Company
10.3 Lease Agreement, dated May 5, 1995 between (1)
Geneva Steel Company, as landlord, and Covol,
as tenant
10.3.1 First Amendment to Lease Agreement, dated May (3)
14, 1996 between Geneva Steel Company, as
landlord, and Covol, as tenant
10.4 Master Equipment Lease Agreement, dated May (1)
4, 1995, between Keycorp Leasing Ltd. and Covol
10.5 1995 Stock Option Plan (1)
10.5.1 First Amendment to the 1995 Stock Option Plan (1)
10.6 Employment Agreement, dated January 1, 1992, with (1)
Kenneth M. Young
10.7 Employment Agreement, dated July 1, 1992, with (1)
Russell Madsen
10.8 Lease Agreement, dated May 31, 1994, between (1)
Covol and Byrleen Hanson regarding Carbon
County, Utah
10.9 Standard Form of Agreement between Owner and (1)
Design Builder dated December 28, 1995 between
Covol and Lockwood Greene Engineers, Inc.
10.9.1 Notice to Proceed from Covol to Lockwood Greene (1)
Engineers, Inc. dated January 14, 1996
10.9.2 Letter Agreement with Lockwood Greene Engineers, (1)
Inc. to extend notice dates.
10.9.3 Letter dated July 26, 1996 from Lockwood Greene (3)
Engineers, Inc. and the Memorandum of Understanding
between Covol Technology, Inc. and Lockwood
Greene Engineers, Inc. dated August 28, 1996
35
<PAGE>
Exhibit No. Description Location
10.9.4 Amendment to Standard Form of Agreement between (3)
Owner and Design/Builder dated December 28, 1995,
dated September 16, 1996, between Covol and
Lockwood Greene Engineers, Inc.
10.10 Engagement Letter dated December 18, 1995 by and (1)
between Covol and Smith Barney
10.10.1 Termination Letter, dated July 8, 1996, from (3)
Smith Barney
10.11 Letter of Understanding dated January 30, 1996 (1)
between Covol and CoBon Energy, LLC
10.11.1 Modification of Letter of Understanding dated (3)
August 20, 1996 between Covol and CoBon Energy, LLC
10.11.2 License Agreement dated September 10, 1996, between (3)
Covol and CoBon Energy, LLC
10.11.3** Project Development Agreement, dated December 30, (9)
1996, between Covol and CoBon Energy LLC
10.11.4** Modification of Project Development Agreement, (9)
dated December 31, 1996, between Covol and CoBon
Energy, LLC
10.12 [Intentionally Omitted]
10.13 Promissory Note dated February 15, 1996 in favor (1)
of Covol from Michael McEwan and Gerald Larson
10.14 [Intentionally Omitted]
10.15 Agreement between Alabama Power Company and (3)
Covol for the Sale and Purchase of Coal, dated
April 16, 1996, between Covol and the Alabama
Power Company
10.16 Employment Agreement, dated June 1, 1996 with (3)
Brent M. Cook
10.16.1 Stock Option Agreement dated June 1, 1996 with (3)
Brent M. Cook
10.18 Letter dated July 19, 1996 from Covol canceling (3)
the Site Identification Agreement
10.19 Term Sheet, dated August 22, 1996, from Covol (3)
common stock to Byrleen Hanson regarding purchase
of Price, Utah office building
10.20 Primary Agreement, dated November 6, 1996, between (3)
Covol and Savage Industries Inc.
10.20.1 Mojave Agreement, dated November 6, 1996, between (3)
Covol and Savage Industries Inc.
10.21 Release to all claims, dated September 13, 1996, (3)
executed by Maynard Moe
36
<PAGE>
Exhibit No. Description Location
10.22 Letter of Understanding, dated September 13, 1996, (3)
between Covol and E.J. Hodder & Associates, Inc.
regarding the sale of the Port Hodder facility
to Covol
10.23 Sublease, dated September 9, 1996, between Covol (3)
and Parker Towing Company, Inc. regarding the
lease of approximately 16 acres located in
Tuscaloosa County, Alabama
10.24 Supply Agreement, dated September 11, 1996, (3)
among Covol, K-Lee Processing, Inc. and Concord
Coal Recovery Limited Partnership
10.25 PacifiCorp Financial Services, Inc. Letter of (3)
Intent (Covol Technologies) dated September 12, 1996
10.26 Exclusive Financial Advisor Agreement, dated (3)
September 16, 1996, between Covol and Coalco
Corporation
10.27 Settlement Agreement, dated September 17, 1996, (3)
among Covol, Environmental Technologies Group
International, Inc., Larson Limestone Company, Inc.,
Michael M. Midgley, Mark Hardman, Kenneth M. Young,
Irene Larson, Farrell Larson, Gary Burningham and
Burningham Enterprises, Inc.
10.28 Debenture Agreement and Security Agreement, dated (3)
December 20, 1996, between AJG Financial Services,
Inc. and Covol
10.29 Arthur J. Gallagher & Co. Letter of Intent, dated (3)
November 13, 1996
10.30 Lease Agreement, dated December 12, 1996, between (3)
Covol and UPC, Inc. regarding Price City, Utah
property
10.31 1996 Standard Form of Agreement between Owner and (3)
Design/Contractor
10.32 Form of Limited Partnership Agreements for Alabama (3)
Synfuel #1, Ltd. ("AS #1") and Utah Synfuel #1, Ltd.
("US #1")
10.33 Utah Project Purchase Agreement, dated as of (4)
March 7, 1997, by and among Covol, US #1, a Delaware
limited partnership, and Coaltech No. 1, L.P., a
Delaware limited partnership ("Coaltech")
10.34 License and Binder Purchase Agreement, dated as of (4)
March 7, 1997, by and among Covol, US #1 and Coaltech
10.35 Operation and Maintenance Agreement, dated as of (4)
March 7, 1997, by and between Covol and Coaltech
10.36 Purchase and Supply Agreement, dated as of March (4)
7, 1997, by and among Covol, US #1 and Coaltech
10.37 Abandonment Option Agreement, dated as of March 7, (4)
1997, by and among Covol and the limited partners of
Coaltech
10.38 Convertible Loan and Security Agreement, dated as (5)
of March 20, 1997, by and between Covol and
PacifiCorp Financial Services, Inc. ("PacifiCorp")
37
<PAGE>
Exhibit No. Description Location
10.38.1 Amendment to Convertible Loan and Security (9)
Agreement, dated December 12, 1997 by and between
Covol and PacifiCorp
10.39 Alabama Project Purchase Agreement ("Alabama (5)
Agreement") dated as of March 20, 1997, by and among
Covol, AS #1 and Birmingham Syn Fuel, L.L.C.
10.39.1 Letter Amendment, dated June 27, 1997, to (9)
Alabama Agreement.
10.39.2 ** Letter Amendment, dated July 7, 1997, to (9)
Alabama Agreement.
10.39.3 Letter Amendment, dated August 28, 1997, to (9)
Alabama Agreement.
10.39.4 Letter Amendment, dated December 12, 1997, to (9)
Alabama Agreement.
10.39.5 ** Amended and Restated License Agreement, and Binder (9)
Purchase dated December 12, 1997, by and among Covol,
AS #1 and Birmingham Syn Fuel.
10.39.6** Letter Amendment dated February 20, 1998, to the (10)
Alabama Project Purchase Agreement dated as of March
20, 1997, by and among Covol, AS #1, and Birmingham
Syn Fuel.
10.39.7 Call Option Agreement date February 20, 1998, (10)
between Birmingham Syn Fuel and Covol.
10.39.8** Letter Amendment dated February 20, 1998, to the (10)
Amended and Restated License and Binder Purchase
Agreement dated as of December 12, 1997, by and among
Covol. AS #1 and Birmingham Syn Fuel.
10.39.9** Non-negotiable Promissory Note dated February 20, (10)
1998, in favor of AS #1, executed by Birmingham Syn
Fuel as debtor.
10.39.10 Security Agreement dated February 20, 1998, by and (10)
among Covol, AS #1 and Birmingham Syn Fuel.
10.40 Conditional Option Agreement, dated as of March 20, (5)
1997, by and among Birmingham Syn Fuel I, Inc.,
Birmingham Syn Fuel II, Inc., PacifiCorp, AS #1 and
Covol
10.41 Registration Rights Agreement, dated as of March 20, (5)
1997, by and between Covol and PacifiCorp
10.42** Amended and Restated Agreement Concerning (9)
Additional Facilities, dated December 12, 1997, by
and between PacifiCorp., Birmingham Syn Fuel, LLC and
Covol
10.43 Lease Agreement between Industrial Management (9)
Engineering, Inc. and Covol
10.44 Employment Agreement, dated January 1, 1997 (9)
with Stanley M. Kimball
10.45** License and Binder Purchase Agreement, dated (9)
December 14, 1997, between Appalachian Synfuel, LLC
and Covol
38
<PAGE>
Exhibit No. Description Location
10.46** Financing Agreement, dated November 14, 1997, (9)
between Covol and CoBon Energy, L.L.C.
10.47** License Agreement, dated as of August 5, 1997, (9)
by and between Pelletco Corporation and Covol
10.48** Preparation Plant and Find Ponds Lease (9)
(Wellington, Utah), dated February 21, 1997, between
Earthco and Covol
10.49** Agreement Concerning Additional Facilities, (9)
dated December 27, 1996, between AJG Financial
Services, Inc. and Covol
10.50** Form of Agreement for Technology Licensing of (9)
Facilitation, dated December 31, 1996, between PC
West Virginia Synthetic Fuel #1, LLC and Covol
10.50.1** Form of Amended and Restated License and Binder (11)
Purchase Agreement dated February 3, 1998, between PC
Virginia Synthetic Fuel #1, PC West Virginia
synthetic Fuel #2, PC West Virginia Synthetic Fuel #3
and Covol.
10.50.2** Loan Agreement between C.C. Pace Capital, L.L.C. and (11)
Carbon Resources, Inc. and Covol dated April 21,
1998.
10.50.3 Security Agreement between C.C. Pace Capital, L.L.C. (11)
and Carbon Resources, Inc. and Covol dated April 21,
1998.
10.51 Employment Agreement, dated March 20, 1997 with (9)
Max E. Sorenson
10.52** Technology License and Binder Purchase Agreement (12)
between Mountaineer Synfuel, L.L.C., Licensee, and
Covol, Licensor
10.52.1 Asset Purchase Agreement between Mountaineer Synfuel, (12)
L.L.C. as Purchase and Covol as Seller dated May 5,
1998
10.52.2 Promissory Note between Covol and Mountaineer (12)
Synfuel, L.L.C. dated May 5, 1998
10.52.3 Deed of Ground Lease between Upshur Property, (12)
Inc. and Covol dated May 5, 1998
10.52.4 Promissory Note dated December 8, 1998 of Covol *
Technologies, Inc. to Mountaineer Synfuel, L.L.C.
10.52.5 Security Agreement dated December 8, 1998 between *
Mountaineer Synfuel, L.L.C. and Covol Technologies,
Inc.
10.52.6 Leasehold Credit Line Deed of Trust and Security *
Agreement dated December 8, 1998 by Covol
Technologies, Inc. for Mountaineer Synfuel, L.L.C. as
Beneficiary.
10.52.7 Amendment No. 1 to Deed of Ground Lease dated *
December 8, 1998 between Upshur Property, Inc. and
Covol Technologies, Inc.
10.53.1 Debenture Agreement and Security Agreement *
dated as of January 9, 1998, between Covol and AJG
Financial Services, Inc.
39
<PAGE>
Exhibit No. Description Location
10.53.2 Debenture dated as of January 9, 1998 between *
Covol and AJG Financial Services, Inc.
10.53.3 Warrant A dated as of January 9, 1998, issued by *
Covol in favor of AJG Financial Services, Inc.
10.53.4 Warrant B dated as of January 9, 1998, issued by *
Covol in favor of AJG Financial Services, Inc.
10.53.5 Registration Rights Agreement dated as of January *
9, 1998, between Covol and AJG Financial Services,
Inc.
10.54 Employment Agreement effective May 1, 1998 with *
Steven G. Stewart
10.55 Employment Agreement effective August 1, 1997 *
with Dee J. Priano
16.1 Letter to Securities and Exchange Commission, (1)
dated March 24, 1995, from Jones, Jensen & Orton &
Company, certified public accountants
21.1 List of Subsidiaries of Covol *
23.1 Consent of PricewaterhouseCoopers LLP *
27.1 Financial Data Schedule for the fiscal year
ended September 30, 1998 *
27.2 Restated Financial Data Schedule for the fiscal *
years ended September 30, 1997 and 1996
- ------------------------
* Filed herewith.
** Confidential treatment has been granted to certain portions of this
exhibit, which portions have been deleted and filed separately with the
Securities and Exchange Commission.
Unless another exhibit number is indicated as the exhibit number for the exhibit
as "originally filed," the exhibit number in the filing in which any exhibit was
originally filed and to which reference is made hereby is the same as the
exhibit number assigned herein to the exhibit.
(1) Incorporated by reference to the indicated exhibit filed with Covol's
Registration Statement on Form 10, filed February 26, 1996.
(2) Incorporated by reference to the indicated exhibit filed with Covol's
Registration Statement on Form 10/A, Amendment No. 2, dated April 24,
1996.
(3) Incorporated by reference to the indicated exhibit filed with Covol's
Annual Report on Form 10-K for the fiscal year ended September 30,
1996.
(4) Incorporated by reference to the indicated exhibit filed with Covol's
Current Report on Form 8-K, dated March 10, 1997.
(5) Incorporated by reference to the indicated exhibit filed with Covol's
Quarterly Report on Form 10-Q, for the quarterly period ended March 31,
1997.
(6) Incorporated by reference to the indicated exhibit filed with Covol's
Quarterly Report on Form 10-Q, for the quarterly period ended June 30,
1997.
40
<PAGE>
(7) Incorporated by reference to the indicated exhibit filed with Covol's
Current Report on Form 8-K, dated August 19, 1997.
(8) Incorporated by reference to the indicated exhibit filed with Covol's
Current Report on Form 8-K, for event dated September 18, 1997, filed
October 28, 1997.
(9) Incorporated by reference to the indicated exhibit filed with Covol's
Annual Report on Form 10-K for the fiscal year ended September 30,
1997.
(10) Incorporated by reference to the indicated exhibit filed with Covol's
Current Report on Form 8-K, for event dated March 3, 1998, filed March
23, 1998.
(11) Incorporated by reference to the indicated exhibit filed with Covol's
Quarterly Report on Form 10-Q, for the quarterly period ended March 31,
1998.
(12) Incorporated by reference to the indicated exhibit filed with Covol's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September
30, 1998.
Exhibits
The response to this portion of Item 14 is submitted as a separate
section of this report. See Item 14 (a) (3) above.
Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate
section of this report. See Item 14 (a) (2) above.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COVOL TECHNOLOGIES, INC.
By:/s/ Brent M. Cook
Brent M. Cook,
Chief Executive Officer and Principal
Executive Officer
By:/s/ Steven G. Stewart
Steven G. Stewart, Principal Financial Officer
Date: January 13, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Brent M. Cook Chief Executive Officer January 13, 1999
- ----------------------- Principal Executive Officer) and
Brent M. Cook Director
/s/ Steven G. Stewart Chief Financial Officer (principal January 13, 1999
- ----------------------- Financial and Accounting
Steven G. Stewart Officer)
/s/ Stanley M. Kimball President and Director January 13, 1999
- -------------------------
Stanley M. Kimball
/s/ DeLance W. Squire Director January 13, 1999
- -------------------------
DeLance W. Squire
/s/ James A. Herickhoff Director January 13, 1999
- -------------------------
James A. Herickhoff
/s/ Raymond J. Weller Director January 13, 1999
- -------------------------
Raymond J. Weller
/s/ John P. Hill, Jr. Director January 13, 1999
- -------------------------
John P. Hill, Jr.
42
<PAGE>
Report of Independent Accountants
To the Board of Directors
Covol Technologies, Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity, and cash flows
present fairly, in all material respects, the consolidated financial position of
Covol Technologies, Inc. and Subsidiaries (the "Company") as of September 30,
1998 and 1997, and the consolidated results of their operations and their cash
flows for the years ended September 30, 1998, 1997 and 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Salt Lake City, Utah
December 22, 1998
F-1
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of September 30,
(thousands of dollars) 1998 1997
- ----------------------------------------------------------------------------------- -------------- ----------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 727 $4,780
Receivables 2,879 13
Receivable - stock subscriptions --- 577
Due from related party 1,012 509
Inventories 1,645 1,819
Advances on inventories 2,522 1,087
Notes receivable - related parties, current 229 276
Facilities held for sale 28,405 8,155
Prepaid expenses and other current assets 682 52
-------------- ----------------
Total current assets 38,101 17,268
-------------- ----------------
Property, plant and equipment, net of accumulated depreciation 14,902 5,464
-------------- ----------------
Other assets:
Restricted investments 748 ---
Note and accrued interest receivable, non-current 6,986 ---
Notes receivable - related parties, non-current 2,869 3,817
Investment in licensee facility 1,000 ---
Intangible assets 3,118 ---
Deposits and other assets 185 321
-------------- ----------------
Total other assets 14,906 4,138
-------------- ----------------
Total assets $67,909 $26,870
============== ================
</TABLE>
continued
The accompanying notes are an integral
part of the consolidated financial statements
F-2
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, continued
As of September 30,
(thousands of dollars and shares) 1998 1997
- ------------------------------------------------------------------------------------ -------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
<S> <C> <C>
Accounts payable $3,036 $3,013
Due to related party 1,609 1,548
Accrued liabilities 2,858 2,500
Notes payable and convertible debentures, current 22,049 5,247
-------------- ----------------
Total current liabilities 29,552 12,308
-------------- ----------------
Long-term liabilities:
Notes payable and convertible debentures, non-current 13,930 2,900
Notes payable - related parties, non-current 147 489
Accrued interest payable, non-current 566 204
Deferred revenues from advance license fees 1,400 1,650
Deferred compensation 236 224
-------------- ----------------
Total long-term liabilities 16,279 5,467
-------------- ----------------
Total liabilities 45,831 17,775
-------------- ----------------
Minority interest in consolidated subsidiaries 507 3,166
-------------- ----------------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $0.001 par value; authorized 10,000 shares,
issued and outstanding 316 shares at September 30, 1998 and 303 shares at
September 30, 1997 (aggregate liquidation preference of $5,465
at September 30, 1998) 1 1
Common stock, $0.001 par value; authorized 25,000 shares, issued and
outstanding 11,272 shares at September 30, 1998 and 8,627 shares at
September 30, 1997 11 9
Common stock to be issued, 0 shares at September 30, 1998 and 462 shares at
September 30, 1997 --- 1
Capital in excess of par value - preferred 5,184 5,094
Capital in excess of par value - common 64,100 41,818
Capital in excess of par value - common stock to be issued --- 3,291
Accumulated deficit (36,177) (32,191)
Notes and interest receivable -- related parties, from issuance of, or
collateralized by, common stock, net of allowance (7,773) (7,411)
Deferred compensation from stock options (3,775) (4,683)
-------------- ----------------
Total stockholders' equity 21,571 5,929
-------------- ----------------
Total liabilities and stockholders' equity $67,909 $26,870
============== ================
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
F-3
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended September 30,
(thousands of dollars and shares, except per-share data) 1998 1997 1996
- --------------------------------------------------------------------- ----------------- ------------------ ------------------
Revenues:
<S> <C> <C> <C>
License fees $7,942 $ --- $ 100
Binder and coal fine sales - related party 2,543 209 ---
Binder sales 994 --- ---
Binder plant sales 1,088 --- ---
Synthetic fuel sales, net 32 42 195
Other 100 --- ---
----------------- ------------------ ------------------
Total revenues 12,699 251 295
----------------- ------------------ ------------------
Operating costs and expenses:
Cost of coal briquetting operations 9,295 4,803 860
Selling, general and administrative 4,436 2,998 3,796
Research and development 422 664 1,044
Compensation expense on stock options, stock warrants and
issuance of common stock 939 2,058 4,873
Loss on sale of facility 218 582 ---
----------------- ------------------ ------------------
Total operating costs and expenses 15,310 11,105 10,573
----------------- ------------------ ------------------
Operating loss (2,611) (10,854) (10,278)
----------------- ------------------ ------------------
Other income (expense):
Interest income 899 286 302
Interest expense (2,745) (1,645) (94)
Minority interest in net losses of consolidated subsidiaries 392 1,245 4
Write-up (write-down) of notes receivable - related parties,
collateralized by common stock 19 (60) (2,700)
Other 60 33 (166)
----------------- ------------------ ------------------
Total other income (expense) (1,375) (141) (2,654)
----------------- ------------------ ------------------
Loss from continuing operations before income taxes (3,986) (10,995) (12,932)
Income tax provision --- --- (23)
----------------- ------------------ ------------------
Loss from continuing operations (3,986) (10,995) (12,955)
----------------- ------------------ ------------------
Discontinued operations (Note 15):
Loss from discontinued operations --- --- (590)
Loss on disposal of discontinued operations --- --- (291)
----------------- ------------------ ------------------
Loss from discontinued operations --- --- (881)
================= ================== ==================
Net loss $(3,986) $(10,995) $(13,836)
================= ================== ==================
Basic and diluted net loss per common share:
Loss per share from continuing operations $(.43) $(1.38) $(1.86)
Loss per share from discontinued operations --- --- (.13)
----------------- ------------------ ------------------
Basic and diluted net loss per common share $(.43) $(1.38) $(1.99)
================= ================== ==================
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
F-4
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Notes and
interest
receivable
-related
parties,
from
issuance
Convertible Preferred Stock Common Stock Common Stock to be Issued of, or Deferred
---------------------------- ------------------------ ------------------------- collater- compen-
Capital in Capital in Capital in Accum- alized sation
(thousands of excess of excess of excess of lated by, common from stock
dollars and shares) 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>
Balances
at
October 1, 1995 --- $--- $--- 5,260 $6 $9,617 119 $1 $582 $(7,360) $(240) $(1,422)
Common stock
issued for
services 114 --- 769 (50) --- (322)
Common stock
issued for
notes receivable
from related
parties,
including
exercise of
stock options 1,010 1 6,283 (6,284)
Common stock
issued for
cash, including
exercise of
stock options
and warrants 1,226 1 7,479 (69) --- (260)
Common stock
to be issued
for cash
received 44 --- 350
Common stock
to be issued
for property
acquired 60 --- 585
Payment on
notes receivable
- - related 171
parties
Issuance of notes
receivable -
related parties,
collateralized
by common stock
(net of $2,700
write-down and
$650 imputed (1,650)
interest)
Services received
in lieu of
payments on
notes receivable
- - related parties 688
Compensation
expense related
to the
issuance of
stock options
at below
market value 3,863
value
Deferred
compensation
related to the
issuance of
stock options
at below market
value to officers,
directors,
employees and
consultants, net of
cancellations 4,668 (4,668)
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
F-5
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY, continued
Notes and
interest
receivable
-related
parties,
from
issuance
Convertible Preferred Stock Common Stock Common Stock to be Issued of, or Deferred
---------------------------- ------------------------ ------------------------- collater- compen-
Capital in Capital in Capital in Accum- alized sation
(thousands of excess of excess of excess of lated by, common from stock
dollars and shares) 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>
Amortization of
deferred
compensation from
stock options 910
Interest earned
on notes receivable
- - related parties (265)
Compensation
expense related
to the issuance
of stock for
services at below
market value 101
Net loss for
the year ended
September 30, 1996 (13,836)
- ------------------- ------- ------ --------- ------ ------ --------- ------ ------ --------- ------- --------- ---------
Balances at
September 30, 1996 --- --- --- 7,610 8 32,780 104 1 935 (21,196) (7,580) (5,180)
- ------------------- ------- ------ --------- ------ ------ --------- ------ ------ --------- ------- --------- ---------
Common stock
issued for cash
received in
the prior period 104 --- 935 (104) (1) (935)
Common stock
issued for cash,
including
exercise of stock
options and warrants 603 1 2,773
Deferred compensation
related to the
issuance of stock
options at below
market value to
officers, directors
and employees 1,178 (1,178)
Common stock
issued for services 98 --- 789
Inducement related
to conversion of notes
payable into common stock 323
Common stock issued
to repay note payable
- - related parties 21 --- 136
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
F-6
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY, continued
Notes and
interest
receivable
-related
parties,
from
issuance
Convertible Preferred Stock Common Stock Common Stock to be Issued of, or Deferred
---------------------------- ------------------------ ------------------------- collater- compen-
Capital in Capital in Capital in Accum- alized sation
(thousands of excess of excess of excess of lated by, common from stock
dollars and shares) 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>
Common stock issued
on conversion of note 141 --- 1,125
payable
Common stock issued
under a subscription 50 --- 350
agreement for cash
received in
October 1997
Common stock to be
issued for cash
received
in the current
period, including
exercise 400 1 2,798
Common stock to
be issued for
distribution 30 -- 266
rights
Common stock to
be issued under
subscription
agreements for
cash received 32 --- 227
in October 1997
Amortization of
deferred
compensation from 1,675
stock options
Interest expense
related to issuance
of convertible
debt at a discount 1,429
Payment on notes
receivable - related 109
parties
Write-down of notes
receivable - related 60
parties
Preferred stock
issued for cash, net
of offering costs 303 1 5,094
Net loss for the
year ended
September 30, 1997 (10,995)
- ------------------- ------- ------ --------- ------ ------ --------- ------ ------ --------- ------- --------- ---------
Balances at
September 30, 1997 303 1 5,094 8,627 9 41,818 462 1 3,291 (32,191) (7,411) (4,683)
- ------------------- ------- ------ --------- ------ ------ --------- ------ ------ --------- ------- --------- ---------
Common stock issued
for cash received in
the previous period 462 -- 3,291 (462) (1) (3,291)
Common stock issued
to purchase minority
interests in subsidiaries 540 1 5,383
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
F-7
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY, continued
Notes and
interest
receivable
-related
parties,
from
issuance
Convertible Preferred Stock Common Stock Common Stock to be Issued of, or Deferred
---------------------------- ------------------------ ------------------------- collater- compen-
Capital in Capital in Capital in Accum- alized sation
(thousands of excess of excess of excess of lated by, common from stock
dollars and shares) 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>
Common stock issued
for cash, including
exercise of stock
options 533 --- 3,257
Preferred stock
issued for cash,
net of offering
costs 13 --- 90
Common stock
issued on
conversion of
notes payable
and accrued
interest to
common stock 1,107 1 8,178
Interest expense
related to
issuance of
convertible debt
at a discount 2,046
Payment received
on notes receivable -- 329
related parties
Amortization of
deferred
compensation from
stock options 908
Write-up of
notes receivable
- -- related (19)
parties
Compensation expense
related to issuance
of stock options
for services 3 -- 127
Reclassification
of notes receivable
- - related parties (672)
Net loss for the
year ended
September 30, 1998 (3,986)
------- ------ --------- ------ ------ --------- ------ ------ --------- ------- --------- ---------
Balances at
September 30, 1998 316 $1 $5,184 11,272 $11 $64,100 0 $0 $0 $(36,177) (7,773) $(3,775)
======= ====== ======== ====== ===== ======== ====== ===== ======== ======== ======= ==========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
F-8
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
(thousands of dollars) 1998 1997 1996
- ---------------------------------------------------------------------------------------------- ----------- ------------ ------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $(3,986) $(10,995) $(13,836)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 607 193 187
Losses applicable to minority interests in subsidiaries (392) (1,245) (4)
Loss on disposal of discontinued operations --- --- 291
Deferred income taxes --- --- 23
Loss on sale of facility 218 582 ---
Interest expense related to issuance of convertible debt at a discount 2,046 1,429 ---
Amortization of deferred compensation and compensation expense on stock options 908 1,675 4,773
Common stock issued or to be issued for services and distribution rights, and
compensation expense related to stock options 127 1,055 547
Write-down (write-up) of notes receivable - related parties (19) 60 2,700
Inducement expense related to conversion of notes payable into common stock --- 323 ---
Services received in lieu of payments on notes receivable issued for common stock --- --- 687
Interest earned on notes receivable - related parties --- --- (265)
Notes payable issued for services --- --- 160
Increase (decrease) from changes in assets and liabilities, net of effects
from investing and financing activities:
Receivables (2,866) 65 (55)
Due from related party (503) (509) ---
Inventories 174 (61) (162)
Advances on inventories (1,435) (1,087) ---
Prepaid expenses and other current assets (630) (7) (32)
Accrued interest receivable - non-current (486) --- ---
Deposits and other assets 136 (121) 24
Accounts payable 23 (1,138) 1,436
Due to related party 61 1,548 ---
Accrued liabilities 851 2,166 47
Accrued interest payable, non-current 362 204 ---
Deferred revenues from advance license fees (250) 1,650 ---
Deferred compensation 12 11 10
Discontinued operations non-cash charges and working capital changes --- --- 894
----------- ------------ ------------
Net cash used in operating activities (5,042) (4,202) (2,575)
----------- ------------ ------------
Cash flows from investing activities:
Purchase of property, plant and equipment and facilities held for sale (36,963) (7,194) (5,055)
Investment in licensee facility (1,000) --- ---
Increase in restricted investments (748) --- ---
Issuance of notes receivable -- related parties --- --- (704)
Proceeds from notes receivable - related parties 323 45 ---
Increase in cash surrender value of life insurance --- (32) (13)
----------- ------------ ------------
Net cash used in investing activities (38,388) (7,181) (5,772)
----------- ------------ ------------
</TABLE>
continued
The accompanying notes are an integral
part of the consolidated financial statements
F-9
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
Year ended September 30,
(thousands of dollars) 1998 1997 1996
- -------------------------------------------------------------------------------------------- ----------- ----------- ------------
Cash flows from financing activities:
<S> <C> <C> <C>
Proceeds from issuance of notes payable and convertible debentures $35,454 $6,070 $ 700
Payment on notes payable (330) (1,109) (159)
Proceeds from issuance of notes payable -- related parties --- 595 ---
Payment on notes payable -- related parties --- (756) (3,539)
Proceeds from receivable -- stock subscriptions 577 --- ---
Proceeds from issuance of common stock, net 3,257 5,573 7,570
Proceeds from issuance of preferred stock, net 90 5,095 ---
Proceeds from notes receivable -- related parties, from issuance of, or
collateralized by common stock 329 109 171
Proceeds from issuance of minority interests in subsidiaries --- 302 4,385
Allocation to minority interest limited partners --- (206) ---
Financing activities of discontinued operations --- --- (1,582)
----------- ----------- ------------
Net cash provided by financing activities 39,377 15,673 7,546
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents (4,053) 4,290 (801)
Cash and cash equivalents, beginning of year 4,780 490 1,291
----------- ----------- ------------
Cash and cash equivalents, end of year $ 727 $ 4,780 $ 490
=========== =========== ============
Supplemental schedule of non-cash investing and financing activities:
Common stock issued on conversion of notes payable and accrued interest $8,179 $ --- $ ---
Note receivable issued for sale of facility 6,500 3,500 ---
Common stock issued for purchase of minority interests in subsidiaries 5,384 --- ---
Note payable issued for inventory --- 1,595 ---
Accounts payable for facilities held for sale 588 1,968 ---
Common stock issued for notes receivable --- 577 6,284
Common stock issued to repay notes payable and accrued interest -- related party --- 1,261 ---
Note payable issued for equipment --- 1,607 ---
Distribution to minority limited partners offset against note receivable --- 66 ---
Obligations assumed in connection with sale of subsidiaries --- --- 4,636
Note receivable received for subsidiaries (net of imputed interest) --- --- 4,350
Note payable issued and common stock to be issued to acquire land --- --- 927
Note payable issued for services --- --- 160
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized:
Continuing operations $49 $208 $111
Discontinued operations --- --- 98
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
F-10
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
----------
1. Summary of Significant Accounting Policies
Business Organization and Nature of Operations
Covol Technologies, Inc. (the Company) was originally incorporated in Nevada
in 1987 and was reincorporated in Delaware in August 1995. In 1991, the
Company acquired a coal briquetting technology (the "Briquetting
Technology"). In 1992, the Company constructed a pilot briquetting plant in
Price, Utah. During 1993, the Company refined the technology to briquette
waste by-products of the steel manufacturing industry. In June 1996, the
Company formed Utah Synfuel #1 Ltd. ("Utah Synfuel #1") and Alabama Synfuel
#1 Ltd. ("Alabama Synfuel #1"), each a Delaware limited partnership
(collectively the "Partnerships"). The Company is both the general partner
and a limited partner in the Partnerships (see Note 14).
The Company's primary business is to commercialize the Briquetting Technology
used to recycle waste by-products from the coal and steel industries into a
marketable source of fuel and revert materials. Through June 30, 1998, the
Company's focus was on the construction of facilities and the licensing of
its Briquetting Technology to companies that constructed facilities that
convert coal fines into synthetic fuel briquettes. At September 30, 1998, the
Company and its licensees were operating 24 of these facilities in eight
states at various levels of production. The four Company-owned facilities are
expected to be sold in 1999. The Company has no current plans to construct
additional synthetic fuel facilities.
The Company anticipates that earned license fees or royalties from the
production and sale of synthetic fuel will continue to increase during 1999.
The Company believes that most of the synthetic fuel facilities will reach
production levels approaching capacity by the end of 1999. As production
levels increase, sales of the binder materials by the Company to its
licensees are expected to increase proportionately. The Company also
anticipates receiving the final amounts of advance license fees totaling
approximately $4,000,000 during 1999. While funds received by the Company
from these activities are not expected to be sufficient to cover the
Company's operating costs and expenses until the third quarter of 1999, the
Company does expect that these operating activities will be producing
significant operating cash flow by the end of 1999.
To provide funding for the Company's operations and debt repayment
requirements during early 1999, the Company will utilize proceeds from the
issuance of debt and equity securities and excess proceeds from the sale of
facilities. During November 1998, the Company issued common stock and common
stock warrants for total proceeds of approximately $3,500,000 and incurred
debt totaling $400,000. The Company has received term sheets for the sale of
up to $10,000,000 of convertible preferred stock. This financing is expected
to close in January 1999. The Company has received correspondence from the
lender holding notes payable due March 1999 and June 1999 indicating a
willingness to extend the due dates for 90 days if so requested by the
Company. If such a request is made, the Company has agreed to issue warrants
for the purchase of common stock to the lender as consideration for the
extension. The Company believes the funds raised in this financing will be
sufficient to fund the Company's operations and debt repayment requirements
until its operating activities begin producing positive cash flow.
Construction Businesses
In 1993 and 1994, the Company acquired four construction companies. In
September 1995, the Company's Board of Directors approved a plan to
discontinue the Company's construction businesses, which were sold effective
February 1, 1996. (See Note 15, "Discontinued Operations").
Principles of Consolidation
The 1996 consolidated financial statements include the accounts of the
Company and its 100% owned construction company subsidiaries, until the time
of their sale in February 1996. The consolidated financial statements for all
years presented include the accounts of the Company and its two majority
owned subsidiaries, Utah Synfuel #1 and Alabama Synfuel #1, from their
inception in 1996. All significant intercompany transactions and accounts are
eliminated in consolidation.
F-11
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, continued
----------
1. Summary of Significant Accounting Policies, continued
Principles of Consolidation, continued
During 1997, the Company became a 1% general partner of Coaltech No. 1 L.P.
("Coaltech"), a Delaware limited partnership, for $10. Based upon the
Company's lack of effective control over Coaltech and the limited partners'
financial responsibility for its operations, the Company's investment in
Coaltech is accounted for using the equity method of accounting with
proportional elimination of intercompany revenues and expenses.
Stock Split
The Company implemented a two-for-one stock split effective January 23, 1996.
All information set forth herein has been adjusted to give effect to this
stock split.
Revenue and Cost Recognition
Revenues from the licensing of the Company's technology are recognized in the
period when earned. Advance license fees are earned when certain synthetic
fuel facility construction milestones are met or when the facilities are
certified operational for their intended use. Advance license fees that
require the Company to render services in the future are deferred and
recognized when its obligations are met. Earned license fees or royalty
payments are recognized in the period synthetic fuel is produced and sold by
licensees. $3,336,000 of license fees in 1998 were from a single licensee and
$1,500,000 were from a second licensee. Revenues from the sale of coal
briquettes are recognized as product is shipped. Collateral is not required
for receivables and allowances are provided for uncollectible accounts.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents are deposited with financial institutions located in Utah.
Restricted Investments
Restricted investments consist primarily of highly liquid interest bearing
deposits held as collateral for certain Company obligations.
Inventories
Inventories are stated at the lower of cost or market with cost determined
using an average cost method, and consist primarily of coal fines, available
for sale. Covol has a lease arrangement that provides for the purchase and
removal of coal fines which are used as feedstock for a synthetic fuel
facility. Payments made under the lease arrangement prior to removal of the
coal fines are recorded as advances on inventories (see Note 2).
Facilities Held for Sale
Facilities held for sale consist of four synthetic fuel facilities, and are
stated at the lower of cost or estimated net realizable value. The facilities
were constructed to be sold to licensees of the Company's technology at or
slightly above their cost. Two of the four facilities are under option for
purchase by the licensees of those facilities, and the Company is actively
pursuing the sale of all four facilities. The Company anticipates completing
the sale of these facilities in 1999. The Company recognizes a gain or loss
on facilities held for sale when the sale is consummated. The gain or loss
represents the difference between the carrying value and the sales price and
is reflected as a component of operating costs and expenses.
F-12
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, continued
----------
1. Summary of Significant Accounting Policies, continued
Property, Plant and Equipment
Property, plant and equipment is recorded at cost, including interest on
funds borrowed during the construction period, and is depreciated using the
straight-line method over its estimated useful life. Maintenance, repairs and
minor replacements are charged to expense as incurred. Upon the sale or
retirement of property, plant and equipment, any gain or loss on disposition
is reflected in the statement of operations and the related asset cost and
accumulated depreciation are removed from the respective accounts.
Intangible Assets
Intangible assets consist of the excess of the value of the consideration
paid for the purchase of certain limited partners' interests in subsidiaries
over the fair values of the related assets, which fair values approximated
their carrying cost (see Note 14). They are being amortized on the
straight-line method over approximately ten years.
Valuation of Long-Lived Assets
The Company periodically evaluates the carrying value of long-lived assets,
including intangible assets, when events and circumstances warrant such a
review. The carrying value of a long-lived asset is considered impaired when
the anticipated cumulative undiscounted cash flow from that asset is less
than its carrying value. In that event, a loss is recognized based on the
amount by which the carrying value exceeds the fair market value of the
long-lived asset. No impairment-related losses have been recognized in the
Company's financial statements for any period presented.
Common Stock Issued for Services
Common stock issued for services is accounted for using the fair value of the
shares of common stock, determined at the time the shares are issued.
Loss per Share Calculation
In 1998, the Company adopted Statement of Financial Accounting Standards No.
128 "Earnings per Share" ("SFAS 128"). SFAS 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is similar to the previous fully
diluted earnings per share. Loss per share amounts for all periods presented
conform to SFAS 128 requirements and no restatements were necessary (see Note
9).
For all periods presented, options, warrants and convertible securities (as
disclosed in Notes 7 and 13) were not included in the calculation of loss per
share because the effect would have been antidilutive.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
F-13
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, continued
----------
1. Summary of Significant Accounting Policies, continued
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year's presentation. These reclassifications had no effect on net loss or
total assets.
2. Advances on Inventories
During 1997, the Company entered into an agreement to purchase coal fines and
made payments totaling approximately $1,146,000, of which $59,000 was
transferred to cost of coal briquetting operations. During 1998, additional
payments totaling approximately $1,583,000 were made, of which $148,000 was
transferred to cost of coal briquetting operations. The net amount paid has
been recorded as advances on inventories. The Company expects to utilize the
majority of these coal fines during 1999, at which time the costs will be
expensed.
Under the agreement, the Company is obligated to pay a total of $5,500,000
between February 1997 and May 2000 for the removal of 2 million tons of coal
fines (a price of $2.75 per ton) from the property. Quarterly payments of
approximately $396,000 are required under the agreement. The agreement also
provides for removal of an additional 500,000 tons at $2.75 per ton. No
payment is required for removal of any coal fines in excess of 2.5 million
tons.
3. Due From/To Related Party
Due from related party consists of amounts receivable from Coaltech for
operating expenses in 1998 and for operating expenses and interest in 1997.
Due to related party represents amounts due to Coaltech for the purchase of
synthetic fuel briquettes.
4. Notes Receivable
<TABLE>
<CAPTION>
Notes receivable consist of the following at September 30:
(thousands of dollars) 1998 1997
---------------------------------------------------------------------------------------------- -------------- --------------
Notes and Accrued Interest Receivable, non-current
<S> <C> <C>
Note receivable from a corporation, bearing interest at 12%, principal and
interest due February 2003, collateralized by a synthetic fuel facility in
Alabama, which was sold by the Company. $6,500 $---
Accrued interest receivable 486 ---
-------------- --------------
Note and interest receivable $6,986 $---
============== ==============
Notes Receivable - Related Parties
Note receivable from Coaltech, bearing interest at 9.7%, principal and
interest payments of $130 due quarterly through December 2007, collateralized
by a synthetic fuel facility in Utah, which was sold by the Company. $3,098 $3,421
Notes receivable from seven officers of the Company, bearing interest at
prime (8.5% at September 30, 1997) plus 2%, principal and interest due August
2000, originally collateralized by interests in Utah Synfuel #1 and Alabama
Synfuel #1. Reclassified in 1998 as notes receivable - related parties,
collateralized by common stock. No interest income was recognized in 1998
or 1997. --- 672
-------------- --------------
3,098 4,093
Less current portion 229 276
-------------- --------------
Notes receivable - related parties $2,869 $3,817
============== ==============
</TABLE>
F-14
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, continued
----------
5. Property, Plant and Equipment
Property, plant and equipment consists of the following at September 30:
(thousands of dollars) Range of estimated useful 1998 1997
lives
--------------------------------------------------------------- ------------------------------- -------------- --------------
<S> <C> <C> <C>
Land $ 153 $ ---
Buildings and improvements 10 - 20 years 11,154 260
Machinery and equipment 5 - 10 years 4,749 2,102
Construction in progress --- 3,698
-------------- --------------
16,056 6,060
Less accumulated depreciation 1,154 596
============== ==============
Net property, plant and equipment $14,902 $5,464
============== ==============
</TABLE>
Depreciation expense was $557,000 in 1998, $193,000 in 1997 and $187,000 in
1996.
6. Investment in Licensee Facility
Investment in licensee facility represents payments made to the licensee of a
synthetic fuel facility located in Pennsylvania in exchange for a 10%
interest in the net cash flows from operation of the facility. The investment
is being accounted for at cost. Cash received by the Company will first be
applied as a reduction of the carrying amount of the investment.
7. Long-term Liabilities
<TABLE>
<CAPTION>
Notes Payable and Convertible Debentures
Notes payable and convertible debentures consist of the following at
September 30:
(thousands of dollars, except per-share data) 1998 1997
------------------------------------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Note payable to a corporation bearing interest at prime (8.25% at September 30, 1998) plus 2%,
collateralized by plant and equipment, principal and interest due December $ 2,900 $ 2,900
1999.
Note payable to a corporation bearing interest at 6%, principal and interest due October 1999,
collateralized by a coal wash plant in Utah. 4,263 945
Note payable to a limited liability company issued in conjunction with funds advanced for the
construction of a synthetic fuel facility in West Virginia, held for sale. As of September 30,
1998, the loan was collateralized by the facility, bore no interest and was originally due at
the earlier of the sale of the facility or January 1999. Subsequent to September 30, 1998, this
entity modified the terms of the note and agreed to loan to the Company additional amounts up
to $1,500. This entity has an option to purchase the facility. If it is not purchased, the
Company has agreed to pay interest on all outstanding amounts at a rate of 10%, payable monthly
beginning January 1999 through June 1999. Beginning July 1999 through May 2000, monthly
payments of $350 will be required, with all unpaid principal and interest due June 2000. Also,
subsequent to September 30, 1998 the Company granted additional collateral to the corporation 8,242 --
in the form of certain license fees receivable by the Company from other synthetic fuel
facilities.
Notes payable to a corporation, bearing interest at 6%. 50% of accrued interest due February
1999 and balance of accrued interest and principal due February 2001. Collateralized by a
synthetic fuel facility in West Virginia, held for sale. 6,680 ---
</TABLE>
F-15
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, continued
----------
7. Long-term Liabilities, continued
(thousands of dollars, except per-share data) 1998 1997
------------------------------------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Note payable to a corporation, bearing interest at 15%, collateralized by a synthetic fuel
facility in Pennsylvania, held for sale, and due at the earlier of the sale of the facility or 5,800 ---
August 1999.
Note payable to a corporation bearing interest at 18% until October 1998, at
which time it increased to 22%, due June 1999, collateralized by a promissory
note receivable and by certain future license fees receivable by the Company.
Warrants to purchase 100,000 shares of common stock were granted in October
1998 based on the outstanding principal balance. A member of the
Company's Board of Directors is affiliated with this corporation. 4,000 ---
Note payable to a corporation, bearing interest at 13% until December 1998, at
which time it increases to 14%. Principal and accrued interest due March 1999,
collateralized by certain future license fees receivable by the Company.
A member of the Company's Board of Directors is affiliated with this
corporation. 4,000 ---
Convertible note payable to a corporation bearing interest at prime plus 2%. Principal of
$6,686 plus accrued interest of $314 was converted to common stock at $7.00 per share in March --- 3,302
1998.
Convertible debenture payable to two individuals and one trust bearing interest at prime plus
2%. Converted to common stock at $11.00 per share in June 1998. --- 1,000
Other 94 ---
------------- -------------
35,979 8,147
Less: current portion 22,049 5,247
============= =============
Total non-current $13,930 $2,900
============= =============
</TABLE>
Substantially all of the Company's property, plant and equipment and
facilities held for sale are collateral for the notes payable. The weighted
average interest rate on notes payable and convertible debentures was 8.5% at
September 30, 1998 and 10.5% at September 30, 1997. Future maturities of
notes payable at September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Year ending September 30, (thousands of
dollars)
--------------------------- ---------------------
<S> <C> <C>
1999 $22,049
2000 7,173
2001 6,757
=====================
Total $35,979
=====================
</TABLE>
Notes Payable - Related Parties, Non-current
Notes payable - related parties represents unsecured amounts due to two
officers of the Company which bear interest at prime (8.25% at September 30,
1998) plus 2%. Principal and interest are due November 2002.
Deferred Compensation
In 1993, the Company assumed a liability to pay a current stockholder of the
Company $40,000 per year for seven years beginning February 1999. The present
value of this liability, discounted at approximately 5%, is reflected as
deferred compensation in the consolidated balance sheet.
F-16
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, continued
----------
7. Long-term Liabilities, continued
Interest Costs
During 1998, the Company incurred total interest costs of approximately
$4,266,000 (including approximately $2,046,000 of non-cash interest expense
resulting from issuance of convertible debt at a discount), of which
approximately $1,521,000 was capitalized. During 1997, the Company incurred
total interest costs of approximately $2,023,000 (including approximately
$1,429,000 of non-cash interest expense resulting from issuance of
convertible debt at a discount), of which approximately $378,000 was
capitalized. During 1996, the Company incurred total interest costs of
approximately $94,000, of which approximately $33,000 was capitalized.
8. Income Taxes
The Company accounts for income taxes using the asset and liability approach
in accordance with Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes". The Company files a consolidated tax
return with its 100% owned subsidiaries. Both majority-owned limited
partnerships file separate tax returns, as required.
As of September 30, 1998, the Company has net operating loss carryforwards of
approximately $21,400,000 which can be used to offset future taxable income.
The net operating loss carryforwards expire from 2005 to 2018. The Company
also has approximately $190,000 in research and development tax credit
carryforwards which can be used to offset future tax liabilities. The tax
credit carryforwards expire from 2007 to 2013. The utilization of these
carryforwards against future taxable income may become subject to an annual
limitation due to changes in ownership of the Company's common stock.
The provision for income taxes from continuing operations for the years ended
September 30, 1998, 1997 and 1996, all of which represents deferred income
taxes, differs from the statutory federal income tax rate due to the
following:
<TABLE>
<CAPTION>
(thousands of dollars) 1998 1997 1996
--------------------------------------------------------------------------- --------------- --------------- --------------
<S> <C> <C> <C>
Tax benefit at statutory rates $1,355 $ 3,738 $3,810
Change in valuation allowance (1,377) (3,840) (4,007)
State income taxes, net of federal tax effect 39 101 363
Other, including redetermination of prior years' tax estimates (17) 1 (189)
--------------- --------------- --------------
Deferred federal income tax provision $ 0 $ 0 $ (23)
=============== =============== ==============
<CAPTION>
The components of the net deferred tax asset as of September 30, 1998 and
1997 are as follows:
(thousands of dollars) 1998 1997
------------------------------------------------------------------------------------------- -------------- ---------------
Deferred tax assets (liabilities):
<S> <C> <C>
Net operating loss carryforwards $7,995 $ 6,282
Research and development tax credit carryforwards 189 189
Compensation expense related to common stock options 2,084 2,003
License fee revenue recognition 315 104
Write-down of notes receivable 304 712
Estimated liabilities 356 551
Depreciation (88) (111)
Other 40 88
-------------- ---------------
Total deferred tax assets 11,195 9,818
Valuation allowance (11,195) (9,818)
-------------- ---------------
Net deferred tax asset $ 0 $ 0
============== ===============
</TABLE>
F-17
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, continued
----------
8. Income Taxes, continued
The valuation allowance increased by $1,377,000 during 1998, representing the
additional amount of deferred tax assets at September 30, 1998 not considered
recoverable through the reversal of taxable temporary differences, or the
generation of future taxable income. The valuation allowance increased by
$3,840,000 during 1997 and by $4,007,000 during 1996. SFAS No. 109 requires
that a valuation allowance be provided if it is more likely than not that
some portion or all of a deferred tax asset will not be realized. The
Company's ability to realize the benefit of its deferred tax assets will
depend on the generation of future taxable income through its continuing
operations or through the sale of assets. Because the Company has not
generated significant revenues to date relating to the Briquetting
Technology, the Company believes that a valuation allowance of $11,195,000
should be provided as of September 30, 1998. This estimate may change in the
near term depending on the level of earned license fees received in 1999.
9. Basic and Diluted Loss per Share
<TABLE>
<CAPTION>
(thousands of dollars and shares, except per-share data) 1998 1997 1996
--------------------------------------------------------------------------- ---------------- --------------- ---------------
Numerator:
<S> <C> <C> <C>
Loss from continuing operations $(3,986) $(10,995) $(12,955)
Loss from discontinued operations --- --- (881)
---------------- --------------- ---------------
Net loss (3,986) (10,995) (13,836)
Preferred stock dividends (337) (189) ---
================ =============== ===============
Net loss attributable to common stockholders $(4,323) $(11,184) $(13,836)
================ =============== ===============
Denominator - weighted average shares outstanding 9,969 8,080 6,941
================ =============== ===============
Loss per share from continuing operations $(.43) $(1.38) $(1.86)
Loss per share from discontinued operations --- --- (.13)
================ =============== ===============
Basic and diluted net loss per share $(.43) $(1.38) $(1.99)
================ =============== ===============
<CAPTION>
For 1998 and 1997, the Company's loss per common share was determined after
taking into account undeclared cumulative preferred stock dividends of
$337,000 and $24,000, respectively and, in 1997 approximately $165,000 of
preferred stock dividends imputed based upon the price of the Company's
common stock at the date the convertible preferred shares were issued.
10. Notes and Interest Receivable -- Related Parties, Collateralized by Common Stock
--------------------------------------------------------------------------------
Notes and interest receivable -- related parties, collateralized by common
stock, consist of the following at September 30:
(thousands of dollars and shares) 1998 1997
---------------------------------------------------------------------------------------------- ------------- --------------
<S> <C> <C>
Note receivable from a shareholder, $5,000 face amount, bearing interest at
6% renegotiated in November 1997, principal and interest of $515 due in
annual installments beginning January 1999 through January 2004, with
remaining balance due January 2005, collateralized by 130 shares of the
Company's common stock held by the Company, options expiring in January 2006
to acquire 50 shares of the Company's common stock committed by the
shareholder to be provided to the Company, and a personal guarantee of the
shareholder. The carrying value is equal to the fair value of the 130 shares
and options to acquire 50 shares and is net of unamortized discount after
renegotiation of $1,281 based upon an imputed rate of 10.25%, and an
allowance for impairment of $2,110 in 1998 ($2,129 in 1997). No interest
income was recognized during 1998, 1997 or 1996. $1,609 $1,590
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, continued
----------
10. Notes and Interest Receivable -- Related Parties, Collateralized by Common
Stock, continued
----------------------------------------------------------------------------
<S> <C> <C>
Notes and interest receivable from 16 current and former officers and
employees, issued upon exercise of options to purchase 450 shares of common
stock at $5.31 to $8.38 per share, bearing interest at 5.7%, principal and
interest due in December 2000, collateralized by 900 shares of the Company's
common stock. No interest income was recognized during 1998 or 1997. 5,492 5,805
Notes receivable from seven officers of the Company, bearing interest at
prime (8.25% at September 30, 1998) plus 2%, principal and interest due
August 2000, originally collateralized by partnership interests which were
subsequently exchanged for 79 shares of the Company's common stock (see Note
14). Reclassified from notes receivable - related
parties in 1998. No interest income has been recognized for any period. 672 ---
Other --- 16
------------- --------------
$7,773 $7,411
============= ==============
</TABLE>
11. Fair Value of Financial Instruments
SFAS No. 107 requires that the fair market value of certain financial
instruments be disclosed in the financial statements. The Company has the
following financial instruments that are subject to the provisions of SFAS
No. 107:
* Cash and cash equivalents
* Receivables
* Notes receivable
* Notes receivable - related parties
* Notes payable and convertible debentures
* Notes payable - related parties
* Notes receivable - related parties, from issuance of, or collateralized
by, common stock
A substantial portion of the Company's financial instruments are of a
short-term nature. Accordingly, while the fair values of some of the
individual financial instruments vary somewhat from their carrying values,
the aggregate carrying values as reflected in the financial statements
approximate fair value.
12. Preferred and Common Stock
Preferred Series A - Non-Voting
As of September 30, 1998, there were 3,000 shares of Series A shares issued
and outstanding. The Series A preferred shares are non-voting and have the
following rights and privileges:
1. The holders of the shares are entitled to cumulative dividends at
the rate of 6% per year of the liquidation value of $1,000 per
share. These dividends accrue whether or not they have been declared
or whether the Company has any profits. Additional shares of Series
A preferred stock may be issued in lieu of cash to pay accrued
dividends on these shares.
2. Upon the liquidation of the Company, the holders of the Series A
preferred shares are entitled to receive $1,000 per share, together
with all accrued and unpaid dividends, if any.
3. Each share of Series A preferred stock includes a warrant to
purchase 28.571 shares of common stock or a total of 85,713 shares,
at a price of $8.00 per share. These warrants expire on August 31,
1999.
F-19
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, continued
----------
12. Preferred and Common Stock, continued
Preferred Series A - Non-Voting, continued
4. The holders of the shares are entitled to convert their shares to
common shares at any time. The number of common shares to be
received upon conversion is determined by multiplying the number of
preferred shares by $1,000 and dividing by the conversion price of
$7.00 per share. At any time after August 31, 1999, the Company has
the right to require any holder of the Series A preferred shares to
convert their shares into common stock.
5. No dividends have been declared through September 30, 1998.
Dividends in arrears at September 30, 1998 totaled approximately
$200,000, or $67 per share.
Preferred Series B - Non-Voting
As of September 30, 1998, there were 312,882 shares of Series B shares issued
and outstanding. The Series B preferred shares are non-voting and have the
following rights and privileges:
1. The holders of the shares are entitled to cumulative dividends at
the rate of approximately 7% per year of the liquidation value of $7
per share. These dividends accrue whether or not they have been
declared or whether the Company has any profits. Additional shares
of Series B preferred stock may be issued in lieu of cash to pay
accrued dividends on these shares.
2. Upon the liquidation of the Company, the holders of the Series B
preferred shares are entitled to receive $7 per share, together with
all accrued and unpaid dividends, if any.
3. Each unit (comprising 3 shares) of Series B preferred stock includes
a warrant to purchase one share of common stock at a price of $8.00
per share. These warrants expire on September 30, 1999.
4. The holders of the shares are entitled to convert their shares to
the same number of shares of common stock at any time, subject to
adjustment for dilution. Accrued dividends may be converted by the
Company into common stock at the conversion price of $7.00 per
share.
5. No dividends have been declared through September 30, 1998.
Dividends in arrears at September 30, 1998 totaled approximately
$162,000, or $.52 per share. Based upon the conversion price per
share at the date of issuance, a non-cash dividend of approximately
$165,000 was imputed upon issuance.
13. Stock Options and Warrants
Stock Options
At September 30, 1998, the Company had one stock option plan (the "Option
Plan") under which 2,400,000 shares of common stock are reserved for ultimate
issuance. A committee of the Company's Board of Directors, or in its absence,
the Board (the "Committee") administers and interprets the Option Plan. This
Committee is authorized to grant options and other awards both under the
terms of the Option Plan and outside the Option Plan to eligible employees,
officers, directors, and consultants of the Company. The Option Plan provides
for the granting of both incentive stock options and non-statutory stock
options. Terms of options granted under the Option Plan, including vesting
requirements, are determined by the Committee. Options granted under the
Option Plan vest over periods ranging from 0 to ten years, expire ten years
from the date of grant and are not transferable other than by will or by the
laws of descent and distribution. Incentive stock option grants must meet the
requirements of the Internal Revenue Code.
F-20
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, continued
----------
13. Stock Options and Warrants, continued
Stock Options, continued
The Company has elected to continue to apply Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and
related interpretations in accounting for its Option Plan. The alternative
fair value method of accounting prescribed by SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), requires the use of option valuation
models that were not developed for use in valuing employee stock options, as
discussed below. Accordingly, under APB 25, no compensation expense has been
recognized for stock option grants to employees, officers and directors when
the exercise price of stock options equals or exceeds the market price of the
Company's common stock on the date of grant.
When options are issued with terms considered compensatory, the related
compensation expense is amortized to expense over the specified vesting
period on a straight-line basis. Deferred compensation related to options
issued in 1998, 1997 and 1996 that vest over time was approximately $0,
$1,178,000 and $4,668,000, respectively. The amortized compensation expense
related to these options was approximately $908,000, $1,572,000 and $910,000
for 1998, 1997 and 1996, respectively. Compensation expense related to
options that vested immediately was approximately $127,000, $103,000 and
$3,863,000 for 1998, 1997, and 1996, respectively.
If the Company had elected to account for options granted in 1998, 1997 and
1996 based on their fair value, as prescribed by SFAS 123, net loss and net
loss per share would have been increased to the pro forma amounts shown in
the table below.
<TABLE>
<CAPTION>
(thousands of dollars, except per-share data) 1998 1997 1996
--------------------------------------------------------------------------- ---------------- --------------- ---------------
<S> <C> <C> <C>
Net loss attributed to common stockholders -- reported $(4,323) $(11,184) $(13,836)
-- pro forma (7,245) (11,799) (14,530)
Basic and diluted net loss per share - reported (.43) (1.38) (1.99)
--pro forma (.73) (1.46) (2.09)
</TABLE>
The fair value of each stock option grant was determined using the
Black-Scholes option pricing model and the following assumptions: expected
stock price volatility of .67 to .70, risk-free interest rate of 4.4% to
7.8%, weighted average expected option lives of 10 years, and no dividends.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including expected stock price volatility.
Because the Company's stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value, in management's
opinion the existing models do not necessarily provide a reliable single
measure of the fair value of stock options.
F-21
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, continued
----------
13. Stock Options and Warrants, continued
Stock Options, continued
The following table is a summary of activity for all of the Company's stock
options for the years ended September 30:
<TABLE>
<CAPTION>
1998 1997 1996
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
(thousands of shares) Shares Price Shares Price Shares Price
------------------------------------------- ------------- ------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,614 $2.85 1,367 $1.62 2,030 $2.37
Granted 850 12.34 445 6.08 1,612 3.51
Exercised (94) 1.93 (73) 1.84 (1,085) 5.92
Canceled --- --- (125) 1.50 (1,190) 1.54
============= ============= ============ ============ ============ =============
Outstanding at end of the year 2,370 $6.29 1,614 $2.85 1,367 $1.62
============= ============= ============ ============ ============ =============
Exercisable at end of year 1,038 $5.23 712 $2.04 463
============= ============= ============ ============ ============ =============
Weighted average fair value of options
granted during the year below market $10.21 $9.53 $12.66
Weighted average fair value of options
granted during the year at market $9.91 $5.57 $0
<CAPTION>
The following table summarizes information about all stock options
outstanding at September 30, 1998:
(thousands of shares) Options Outstanding Options Exercisable
------------------------ ------------------------------------------------------------- ------------------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
Range of Exercise September 30, Contractual Life Exercise September 30, Exercise
Prices 1998 in Years Price 1998 Price
------------------------ ---------------------- ------------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
$1.50 to $3.50 1,221 7.3 $1.58 602 $1.66
$7.00 to $9.00 397 8.5 8.22 257 8.20
$11.00 to $13.56 752 9.0 12.92 179 13.02
---------------------- ------------------
2,370 1,038
====================== ==================
</TABLE>
Stock Warrants
As of September 30, 1998, there were warrants outstanding for the purchase of
approximately 2,033,000 shares of common stock at prices ranging from $7.00
to $30.00 per share and with expiration dates from October 1998 to September
2000. All of these warrants were issued in connection with private placements
of common and preferred stock or notes payable during the years 1996 through
1998.
In October 1998, the Company issued warrants for the purchase of 100,000
shares of common stock in accordance with the terms of a note payable to a
corporation (see Note 7).
F-22
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, continued
----------
14. Purchase of Limited Partners' Interests in Subsidiaries
In September 1998, the Company formally offered the limited partners in its
two consolidated subsidiaries, Utah Synfuel #1, and Alabama Synfuel #1, an
exchange of the Company's common stock for their limited partnership
interests. The exchange ratio was based in part on an independent valuation
of the limited partnerships' assets and other factors including but not
limited to current and future expected cash flows of the partnerships and the
market value of the Company's common stock at the date of the offer, $9.00
per share. As of September 30, 1998, substantially all of the limited
partners had elected to exchange their limited partnership interests for
shares of the Company's common stock. During October and November 1998, all
but one of the other limited partners exchanged their interests and Utah
Synfuel #1 became a wholly-owned subsidiary of the Company and Alabama
Synfuel #1 became a 98%-owned subsidiary of the Company. The Company recorded
this exchange using the market values of the Company's common stock on the
dates the limited partners tendered acceptance of the Company's offer. These
market values ranged from $6.75 to $11.13 per share.
15. Discontinued Operations
In 1995, the Company made a strategic decision to focus its efforts
exclusively on commercializing the Briquetting Technology and to divest
itself of its construction subsidiaries. In September 1995, the Board of
Directors approved a plan to dispose of the construction-related operations
and in February 1996 entered into a stock purchase agreement to sell all of
the common shares of the subsidiaries for a $5,000,000 face value promissory
note. The terms of the original agreement were clarified in November 1997 and
the financial effect is included in the change in the allowance to reduce the
promissory note to collateral value (discussed below). Because the note
includes a favorable interest rate for the buyer, the Company has calculated
the present value of the note using a market rate of 10.25% over the term of
the note. The effect of discounting the note at 10.25% was to reduce the note
to approximately $3,719,000 as of the renegotiation date. The original
discount on the note was included in the estimated loss on disposal of
discontinued operations in 1996.
Because the note is collateralized by the Company's common stock, it is
reflected in the consolidated financial statements as a reduction of
stockholders' equity. Additionally, the note is adjusted to reflect
subsequent increases or decreases in the fair value of the Company's stock
and stock options held as collateral. Subsequent changes in the value of the
collateral will be reflected in the statement of operations and as an
increase or decrease to the carrying value of the note.
Under the terms of the agreement, the Company agreed to pay $3,500,000 of
accounts payable and lines of credit outstanding in the subsidiaries.
Subsequently, the buyer also received reimbursement from the Company for
approximately $650,000 of additional expenses related to the discontinued
operations during the wind-down period which were paid by the buyer. The
Company has reflected those obligations in the loss on discontinued
operations in 1996. Revenues of the discontinued operations were
approximately $1,397,000 for the four months ended February 1, 1996, the date
of sale.
F-23
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, continued
----------
16. Commitments and Contingencies
Commitments and contingencies as of September 30, 1998 not disclosed
elsewhere, are as follows:
Leases
Rental expense was approximately $473,000, $318,000, and $330,000 for 1998,
1997 and 1996, respectively. The Company has a noncancellable operating lease
for equipment through the year 2000 and other operating leases for real
estate. At September 30, 1998, minimum rental payments due under these
leases, are as follows:
Year ending September 30: (thousands of dollars)
----------------------------- -----------------------
1999 $664
2000 496
2001 314
2002 113
2003 36
=======================
$1,623
=======================
Letters of Credit
During 1998, the Company entered into letter of credit arrangements with a
bank that provide for the issuance of letters of credit totaling up to
$938,000. These arrangements are collateralized by certificates of deposit
totaling $588,000 that are included in restricted investments in the
accompanying balance sheet. As of September 30, 1998, there was approximately
$560,000 of liabilities covered by these arrangements.
Legal or Contractual Matters
Included in accrued liabilities is $755,000 ($1,477,000 in 1997) related to
construction contracts that contained a "failure to proceed" liability
clause.
In December 1996, the Company entered into indemnification agreements in
connection with construction contracts for certain synthetic fuel facilities
entered into by independent third parties. These contracts call for
liquidated damages of $750,000 per contract if construction of the facilities
is not completed by June 1, 1998. The Company indemnified the contractor for
these potential liabilities. The contracting party did not construct three of
the facilities. Accordingly, the maximum contingent liability under these
indemnification agreements would be $2,250,000. The contractor and the owner
have initiated arbitration claims against each other including owner claims
for liquidated damages. The Company is closely monitoring the situation and
believes that payment of a material amount by the Company is unlikely.
In June 1997, the Company sold the Utah Synfuel #1 facility to Coaltech. In
connection with this sale, Utah Synfuel #1 sold to Coaltech a license to use
the Company's Briquetting Technology for an advance license fee of $1,400,000
and an earned license fee that is payable quarterly and is based upon
briquettes manufactured and sold at the Utah Synfuel #1 facility. The Company
contracted with Coaltech to operate the facility for which it receives a
quarterly fee which is also based upon briquettes produced and sold. Coaltech
has an option wherein they can require the Company to purchase this facility
under certain conditions. The purchase price is equal to fair market value,
not to exceed 50% of the amounts paid to Covol by Coaltech.
Additionally, the Company entered into a supply and purchase agreement
wherein the Company agreed to provide coal fines to Coaltech for processing
into synthetic fuel at a price equal to its cost. The Company agreed to
purchase from Coaltech the synthetic fuel produced at Coaltech's cost plus
one dollar per ton. Based upon expected manufacturing costs and current coal
prices, the Company expects to incur a loss under this supply and purchase
agreement which will reduce the earned license fees received. The Company
believes the earned license fees will exceed the losses incurred under the
supply and purchase agreement. Because of the expected loss under this supply
and purchase agreement, revenue recognition of the advance license fee has
been deferred as of September 30, 1998 and 1997.
F-24
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, continued
----------
16. Commitments and Contingencies, continued
Legal or Contractual Matters, continued
In June 1996, the Company formed Alabama Synfuel #1 to construct a synthetic
fuel facility. In connection with the construction of this facility, the
Company entered into a supply agreement for coal fines to be used at the
facility, under which the Company was obligated to purchase a minimum of
20,000 tons of coal fines per month through December 2001. The Company
assigned this agreement to the purchaser of the facility and accordingly, has
no ongoing obligation. The Company has a dispute with the provider of coal
fines, the resolution of which is not expected to have a material impact on
the Company.
In May 1995, the Company entered into an agreement with Geneva Steel Company
to build and operate a commercial iron revert briquetting plant. The facility
never reached commercial productivity levels and is not operational. The
Company may use this equipment for the production of synthetic fuel or for
testing purposes.
The Company entered into a letter of intent with Innovative Technologies
("Innovative") in July 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. In March 1997, Innovative Holding Company,
Inc., filed a civil complaint against the Company alleging breach of the
letter of intent and damages in excess of $500,000. The Company successfully
defended this action which was dismissed with prejudice.
In December 1996, the Company entered into license agreements with affiliates
of Pace Carbon Fuels, L.L.C. (collectively "Pace") for the use of Company
technologies at four synthetic fuel manufacturing facilities owned by Pace.
In 1998 Pace requested a reduction in the license fees payable to the Company
under the license agreements. Upon condition of immediate payment by Pace of
advance license fees, the Company agreed to a reduction in future earned
license fees. This reduction was accomplished by a ten-year loan agreement
whereby the Company would loan to Pace up to $750,000 each quarter beginning
in November 1998. The Company's loan to Pace will be repaid at the end of the
ten years only if the Pace projects have accumulated sufficient prescribed
earnings. Revenues from earned license fees will be recognized by the Company
only to the extent that amounts exceed the loan commitment. Pace has
requested a loan of $750,000 for the November 1998 quarter. The Company
believes that its current loan obligation to Pace is limited to the earned
license fee receivable by the Company for the quarter ended September 30,
1998, which is believed to be approximately $300,000.
In January 1996, a manager of the Company entered property owned by Nevada
Electric Investment Company, 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 some asbestos over a two-day
period. In May 1996, the Company received a notice of violation and order for
compliance from the State of Utah, Division of Air Quality alleging that
asbestos was improperly handled, removed, and disposed of. The Company
complied with the order and in September 1996 entered into a settlement
agreement with the State of Utah and paid a fine in the amount of $11,000. In
late 1997, the U.S. Environmental Protection Agency began its own
investigation, referring the matter to the U.S. Attorney's office which
proceeded with a grand jury inquiry. The Company does not know the results of
the grand jury inquiry or whether the inquiry is completed. The Company does
not believe that the resolution of this matter will have a material adverse
effect on the Company.
As of September 30, 1998, the Company has recorded liabilities to The
Industrial Company ("TIC") totaling approximately $735,000. In November 1998,
the Company was served with liens from TIC in amounts totaling approximately
$1,150,000 for construction payments TIC claims are due for certain synfuel
facilities. The Company is negotiating with TIC for the settlement and
release of the liens and believes that payment of a material amount beyond
what has been accrued by the Company is unlikely.
F-25
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, continued
----------
16. Commitments and Contingencies, continued
Legal or Contractual Matters, continued
The Company is also involved in several legal proceedings that have arisen
out of the normal course of business. The Company believes that many of these
claims are without merit and in all cases intends to vigorously defend their
position. Management does not believe that the outcome of these activities
will have a significant effect upon the operations or the financial position
of the Company.
Employment Contracts
The Company has entered into employment agreements with the Chief Executive
Officer, President, Chief Financial Officer and two vice presidents. The
agreements, which are renewable by the Company, generally have a term of
approximately three years and provide for annual salaries and benefits
ranging from approximately $80,000 to $190,000 annually per officer, and
currently totaling approximately $600,000 for all five officers combined. All
agreements provide for termination benefits under specific conditions ranging
up to 200% of the then current annual salaries.
17. Events Subsequent to September 30, 1998
Subsequent to September 30, 1998, a total of approximately 308,000 shares of
the Company's common stock were issued on conversion of approximately 285,000
shares of Series B preferred stock and related accrued but unpaid dividends
in arrears.
During November and December 1998, the Company completed financing
transactions that consisted of $400,000 of debt and approximately $3,500,000
of equity. The debt has a term of twelve months, bears interest at 15%, with
an interest only payment due in six months and with the balance of interest
and principal due at maturity. The debt is collateralized by certain assets
of the Company and is due prior to maturity upon the placement of long-term
financing by the Company. The equity transaction consisted of the sale of
units at a price of $5.00 per unit. A unit consists of one share of
restricted common stock plus a warrant to purchase one additional share of
restricted common stock at an exercise price of $7.50. The warrants expire in
twelve months if not exercised. The restricted stock and shares issuable
pursuant to the related warrants have been provided piggyback registration
rights.
The Company has received term sheets for the sale of up to $10,000,000 of
convertible preferred stock. This financing is expected to close in January
1999.
F-26
PROMISSORY NOTE
$9,750,000 December 8, 1998
FOR VALUE RECEIVED, COVOL TECHNOLOGIES, INC., a Delaware corporation
("Maker"), hereby unconditionally promises to pay to the order of MOUNTAINEER
SYNFUEL, L.L.C., a Delaware limited liability company ("Payee"), at such place
as Payee may from time to time designate in writing to Maker, the principal sum
of $9,750,000, or, if less, the sum of (i) $8,250,000 plus (ii) any additional
amounts ("Additional Amounts") loaned on the date hereof or hereafter by or on
behalf of Payee to Maker up to a maximum additional amount of $1,500,000
pursuant to the letter agreement of even date herewith among Maker, Payee,
Fannie Mae and MSDW Synfuels II, Inc., together with all unpaid interest
thereon, on June 30, 2000 (the "Maturity Date"), or sooner as hereafter
provided.
1. Notation of Additional Amounts. Payee is authorized to record, on
the schedule annexed hereto and made a part hereof, or on other appropriate
records of Payee, the date and amount of each Additional Amount loaned by Payee
to Maker, provided, however, that failure by Payee to make any recordation or
other error therein shall not limit or otherwise affect the obligations of Maker
hereunder.
2. Interest. The unpaid principal balance of this promissory note (as
amended, modified or supplemented from time to time, this "Note") from time to
time outstanding shall bear interest at a per annum rate equal to ten percent
(10%), but in no event higher than the maximum lawful rate that may be
contracted for, charged, taken, reserved or received by Payee in accordance with
applicable law. Interest hereon shall be computed on the basis of a year of 365
or 366 days, as applicable, for the actual number of days elapsed.
3. Manner of Payment and Application of Funds. The principal and
accrued interest on this Note shall be due and payable as follows:
(a) Unless this Note has been accelerated pursuant to Section
6 hereof, commencing on January 31, 1999 and continuing on the last day
of each month thereafter through June 30, 1999, the Maker shall pay
accrued interest on the outstanding principal amount hereof;
(b) Unless this Note has been accelerated pursuant to Section
6 hereof, commencing July 31, 1999 and continuing on the last day of
each month thereafter through May 31, 2000, the Maker shall pay the
amount of $350,000, such payment being applied first to the payment of
accrued but unpaid interest and then to principal; and
(c) All unpaid principal and accrued interest on this Note
shall be due and payable on the earlier of the Maturity Date or
acceleration pursuant to Section 6 hereof.
-1-
<PAGE>
All sums payable hereunder will be payable by Maker to Payee in funds
constituting lawful money of the United States of America and in immediately
available funds. Maker's obligation to make payments hereunder is absolute and
unconditional and shall not be subject to any defense, claim, counterclaim,
setoff, recoupment, abatement or other right that Maker may now or hereafter
have against Payee or any other person or entity.
4. Prepayment of Principal. From and after January 29, 1999, Maker
shall be entitled to prepay at any time(s) the outstanding principal balance
hereof, in whole or in part, plus accrued interest thereon without premium or
penalty. All prepayments shall be applied first to accrued but unpaid interest
and then to principal. This Note shall not be prepayable in whole or in part
prior to January 15, 1999.
5. Security Agreement. This Note is secured by a Security Agreement (as
amended, modified or supplemented from time to time, the "Security Agreement")
and by a Leasehold Credit Line Deed of Trust and Security Agreement (the
"Leasehold Deed of Trust and Security Agreement"), each of even date herewith
executed by Maker in favor of Payee, to which reference is made for a statement
of the rights and obligations of Maker and Payee in relation thereto.
6. Events of Default. Maker shall be in default under this Note upon
the occurrence of any of the following events or conditions (each, an "Event of
Default"):
(a) Maker fails to pay any principal, interest or other
amounts payable under this Note when due;
(b) Maker commences or becomes the subject of any proceedings
under any bankruptcy, reorganization, compromise, arrangement,
insolvency, readjustment of debts, conservatorship, moratorium,
dissolution, liquidation, or similar debtor relief laws of any
jurisdiction, whether now or hereafter in effect, and, in the case of
involuntary proceedings, such proceedings are not dismissed,
discharged, stayed or restrained within 60 days of the commencement
thereof, or makes an assignment for the benefit of its creditors, or
fails to pay its debts generally as they become due;
(c) Maker liquidates or dissolves itself (or suffers any
liquidation or dissolution) or otherwise winds up or terminates its
existence;
(d) An "Event of Default" as specified and defined in the
Security Agreement or the Leasehold Deed of Trust and Security
Agreement shall have occurred.
7. Acceleration and Other Remedies.
(a) If an Event of Default described in Section 6(b) above
occurs, the aggregate unpaid principal balance of and any accrued
interest on this Note shall thereupon become due and payable
concurrently therewith, without any action by Payee or any subsequent
holder of this Note, and without diligence, presentment, demand,
protest, notice of protest or intent to accelerate, or notice of any
other kind, all of which are hereby expressly waived (except to the
extent waiver of the foregoing is not permitted by applicable law). If
any other Event of Default occurs, Payee or any subsequent holder
hereof may, upon written notice to Payee of such Event of Default (i)
declare the unpaid principal balance of and any accrued interest
-2-
<PAGE>
on this Note immediately due and payable, whereupon it will be due and
payable without diligence, presentment, demand, or protest, all of
which are hereby expressly waived (except to the extent waiver of the
foregoing is not permitted by applicable law), and (ii) exercise all
other rights and remedies available by agreement, at law or in equity.
(b) Failure to exercise any of the foregoing options will not
constitute a waiver of the right to exercise the same or any other
option at any subsequent time in respect to any other event. The
acceptance by Payee of any payment hereunder that is less than payment
in full of all amounts due and payable at the time of such payment will
not constitute a waiver of the right to exercise any of the foregoing
options at that time or at any subsequent time or nullify any prior
exercise of any such option without the express written consent of
Payee.
8. Waivers. Maker and any endorsers, sureties or guarantors hereof
severally waive presentment and demand for payment, notice of intent to
accelerate maturity, notice of acceleration of maturity, protest and notice of
protest and non-payment, other notice of any kind, bringing of suit and
diligence in taking any action to collect any sums owing hereunder or in
proceeding against any of the rights and properties securing payment hereof.
Maker and any endorsers, sureties or guarantors hereof also severally waive any
notice of or defense on account of any extensions, renewals, partial payments or
changes in any manner of or in this Note or in any of its terms, provisions and
covenants, or any delay, indulgence or other act of any trustee or any holder
hereof, whether before or after maturity.
9. Legal Interest Limitations. It is the intent of Maker and Payee to
conform strictly to all applicable state and federal usury laws. All agreements
between Maker and Payee, whether now existing or hereafter arising and whether
written or oral, are hereby expressly limited so that in no contingency or event
whatsoever, whether by reason of acceleration of the maturity hereof or
otherwise, shall the amount contracted for, charged or received by Payee for the
use, forbearance, or detention of the money to be loaned hereunder or otherwise,
or for the payment or performance of any covenant or obligation contained herein
or in any other document evidencing, securing, or pertaining to the indebtedness
evidenced hereby which may be legally deemed to be for the use, forbearance or
detention of money, exceed the maximum amount which Payee is legally entitled to
contract for, charge or collect under applicable state or federal law. If from
any circumstance whatsoever fulfillment of any provision hereon or of such other
documents, at the time performance of such provision is due, involves
transcending the limit of validity prescribed by law, then the obligation to be
fulfilled shall be automatically reduced to the limit of such validity, and if
from any such circumstance Payee ever receives as interest or otherwise an
amount in excess of the maximum that can be legally collected, then such amount
which would be excessive interest shall be applied to the reduction of the
principal indebtedness hereof and any other amounts due under any other
instrument evidencing, securing or pertaining to the indebtedness evidenced
hereby, but not to the payment of interest; and if such amount which would be
excessive interest exceeds the unpaid balance of principal hereof and all other
non-interest indebtedness described above, then such additional amount will be
refunded to Maker. All sums paid or agreed to be paid by Maker for the use,
forbearance or detention of the indebtedness of Maker to Payee shall, to the
extent permitted by applicable law, be amortized, prorated, allocated, and
spread throughout the full term of such indebtedness until payment in full so
that the amount of interest on account of such indebtedness is uniform
throughout the term thereof and does not exceed the maximum permitted by
applicable law.
-3-
<PAGE>
The terms and provisions of this paragraph shall control and supersede every
other provision of all agreements between Maker and the Payee.
10. Severability. If any provision of this Note or any related
documents is held to be illegal, invalid or unenforceable under present or
future laws or regulations, that provision will be fully severable. The affected
instrument, document or agreement shall be construed and enforced as if the
severed provision had never been a part thereof, and the remaining provisions
shall remain in full force and effect and shall not be affected by the severed
provision or by its severance therefrom. In lieu of the severed provision, there
shall be added automatically as a part of the affected instrument, document or
agreement a provision that is legal, valid and enforceable, and as similar in
terms to the severed provision as may be possible.
11. Notices. All notices, requests or communications required or
permitted to be given hereunder shall be in writing and shall be deemed to have
been properly given if (a) mailed by first-class United States mail, postage
prepaid, registered or certified with return receipt requested, (b) delivered by
a nationally recognized overnight delivery service with written confirmation of
delivery, (c) delivered in person to the intended addressee, or (d) sent by
facsimile transmission with confirmation of delivery. Any notice mailed as above
provided will be effective upon its deposit in the custody of the U.S. Postal
Service; all other notices will be effective upon receipt. All notices hereunder
shall be given at the following addresses:
if to Maker: Covol Technologies, Inc.
3280 North Frontage Road
Lehi, Utah 84043
Facsimile: (801) 768-4483
Attention: Stanley M. Kimball
if to Payee: Mountaineer Synfuel, L.L.C.
3280 North Frontage Road
Lehi, Utah 84043
Facsimile: (801) 766-1979
Attention: Harlan M. Hatfield
with copies to: MSDW Synfuels II, Inc.
1221 Avenue of the Americas
23rd Floor
New York, New York 10020
Facsimile: (212) 762-6912
Attention: Debra M. Aaron
and
Fannie Mae
3900 Wisconsin Avenue, N.W.
Washington, D.C. 20016-2892
Facsimile: (201) 752-6088
Attention: William E. Einstein
-4-
<PAGE>
Any such entity may change its address for notice hereunder to any other
location within the continental United States by giving 30 days prior notice
thereof to each other such entity in accordance with this paragraph.
12. Assignment. This Note, the rights, powers and interests held by
Payee hereunder and under the Security Agreement may be transferred and assigned
by Payee, in whole or in part, at such time and upon such terms as Payee may
deem advisable, without the consent of Maker. Maker will not assign any of its
rights, powers or interests hereunder without the prior written consent of
Payee.
13. Amendment/Modification/Consent. This Note may not be amended,
supplemented or otherwise modified, except by express written consent of Maker
and Payee. No consent of Payee hereunder shall be effective unless approved in
writing by MSDW Synfuels II, Inc. and Fannie Mae.
14. Governing Law. This Note shall be governed by and construed and
enforced in accordance with the laws of the State of New York, without giving
effect to the principles of conflict of law of New York.
15. ENTIRE AGREEMENT. THIS WRITTEN AGREEMENT AND THE OTHER DOCUMENTS
REFERENCED HEREIN OR CONTEMPLATED HEREBY REPRESENT THE FINAL AGREEMENT BETWEEN
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS AMONG THE PARTIES.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-5-
<PAGE>
IN WITNESS WHEREOF, Maker hereby executes this Note on the date first
above written.
COVOL TECHNOLOGIES, INC.
a Delaware corporation
By: /Stanley M. Kimball/
------------------------------
Printed Name: Stanley M. Kimball
Its: President
-6-
<PAGE>
Schedule of Additional Amounts
Under Promissory Note of
Covol Technologies, Inc.
Dated December 8, 1998
Date of Additional Amount Loan Amount of Additional Amount Loan
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (as amended, modified or supplemented from time
to time, this "Security Agreement") is made and entered into as of December 8,
1998, by and between MOUNTAINEER SYNFUEL, L.L.C., a Delaware limited liability
company ("Secured Party"), and COVOL TECHNOLOGIES, INC, a Delaware corporation
("Debtor").
1. Indebtedness. The Security Interest (as defined below) is herein
created to secure payment and performance of that certain promissory note (as
amended, modified or supplemented from time to time, the "Note") of even date
herewith executed by Debtor and payable to the order of Secured Party in the
original principal sum of NINE MILLION SEVEN HUNDRED FIFTY THOUSAND and No/100
Dollars ($9,750,000), all renewals and extensions thereof (the "Indebtedness").
2. Collateral. For value received, Debtor hereby grants to Secured
Party a security interest ("Security Interest") in all of Debtor's rights to
receivables and payments in respect of the "Maple Creek Mining, Inc., Ginger
Hill, P.A." project and the "Ohio Valley Coal Company, Alledonia, OH" project
under the Amended and Restated License and Binder Purchaser Agreement, made and
entered into as of April 15, 1998, by and between Pelletco Corporation
("Pelletco") and Debtor, as the same may be amended from time to time together
with the related Assignment of License Agreement, made and entered into as of
April 15, 1998 between Pelletco and Ginger Hill Synfuels, L.L.C. and Assignment
of License Agreement made and entered into as of April 15, 1998 between Pelletco
and Pleasant Ridge Synfuels, L.L.C. (collectively, the "License Agreement"),
including, but not limited to, (i) all substitutions and replacements therefor
and (ii) all proceeds, products and increases thereof (other than receivables
and payments arising under Section 4.2(i) of such License and Binder Purchase
Agreement) (the "Collateral"). Notwithstanding such grant, the Secured Party is
not assuming any liability or obligation under the License Agreement and Debtor
shall remain solely responsible for performance of its obligations thereunder.
Debtor from time to time may propose substitute collateral to replace and
release the security interest created hereby in the Collateral. Secured Party
will in good faith evaluate the proposed substitute collateral.
3. Debtor's Warranties, Covenants and Further Agreements.
A. Organization and Authority. Debtor is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Delaware. Debtor has the corporate power and authority to
execute, deliver and perform the Note and this Security Agreement, and
the execution, delivery and performance of the Note and this Security
Agreement by Debtor have been duly authorized by all necessary
corporate action on the part of Debtor and do not and will not violate
any law, rule or regulation or the certificate of incorporation or
bylaws of Debtor and do not and will not conflict with, result in a
breach of, or constitute a default under, the provisions of any
indenture, loan agreement, security agreement or other instrument or
agreement pursuant to which Debtor or any of its property is bound.
-1-
<PAGE>
B. Enforceable Obligation. The Note and this Security
Agreement have been duly executed and delivered by Debtor and, assuming
the due execution and delivery of this Security Agreement by Secured
Party, each constitutes a legal, valid and binding obligation of Debtor
enforceable in accordance with its terms. The License Agreement has
been duly executed and delivered by the parties thereto and constitutes
a legal, valid and binding obligation of the parties thereto
enforceable in accordance with its terms.
C. Consent, Approval or Other Action. No consent, approval or
other action by, notice to or filing with any governmental body or
other person or entity is required for the grant, perfection or
exercise by Secured Party of its rights hereunder, except for the
filing of the financing statement(s) being made in connection with this
Security Agreement.
D. Title. Debtor has title to the Collateral free from any
lien, security interest, encumbrance or claim and Debtor will, during
the term of this Security Agreement, at Debtor's cost, keep the
Collateral free from other liens, security interests, encumbrances or
claims, and defend any action which may affect the Security Interest or
Debtor's title to the Collateral. This Security Agreement and any
account, instrument or document which is, or shall be, included in the
Collateral is and shall be, genuine and legally enforceable and free
from any set off, counterclaim or defense.
E. Perfection. No financing statement covering the Collateral
or any part or proceeds thereof is on file in any public office and, at
Secured Party's request, Debtor will join in executing all financing
statements and other instruments deemed necessary by Secured Party to
perfect the Security Interest under the laws of the United States or
any State thereunder. This Security Agreement and the financing
statements filed in connection herewith create a valid and perfected
first priority security interest in the Collateral securing the
Indebtedness.
F. Disposition of Collateral. Notwithstanding any other
provision hereof, Debtor will not amend, modify, sell, assign,
transfer, pledge or otherwise dispose of all or part of the Collateral,
whether voluntarily or by operation of law, except with the prior
written consent of the Secured Party.
G. Principal Place of Business. The principal place of
business and chief executive office of Debtor, and the office where
Debtor keeps its books and records, including records relating to the
Collateral, is located at the address of Debtor listed in Section 10
below.
H. Further Assurances. At any time and from time to time, upon
the request of Secured Party, and at the sole expense of Debtor, Debtor
shall promptly execute and deliver all such further instruments and
documents and take such further action as Secured Party may deem
necessary or desirable to preserve and perfect its Security Interest in
the Collateral and carry out the provisions and purposes of this
Security Agreement, including, without limitation, the execution and
filing of such financing statements as Secured Party may require. A
carbon, photographic, or other
-2-
<PAGE>
reproduction of this Security Agreement or of any financing statement
covering the Collateral or any part thereof shall be sufficient as a
financing statement and may be filed as a financing statement.
I. Obligations. Debtor shall duly and punctually pay and
perform the obligations of Debtor under the Note, the License Agreement
and this Security Agreement.
J. Notification. Debtor shall promptly notify Secured Party of
(i) any lien, security interest, encumbrance, or claim made or
threatened against the Collateral, (ii) any material change in the
Collateral, including, without limitation, any breaches by any party to
the License Agreement, and (iii) the occurrence or existence of any
Event of Default (as defined below) or the occurrence or existence of
any condition or event that, with the giving of notice or lapse of time
or both, would constitute an Event of Default.
K. Corporate Changes. Debtor shall not change its name,
identity, or corporate structure in any manner unless Debtor shall have
given Secured Party thirty (30) days prior written notice thereof and
shall have taken all action deemed necessary or desirable by Secured
Party to make each financing statement filed in connection with this
Security Agreement not seriously misleading. Debtor shall not change
its principal place of business, chief executive office or the
location(s) of the Collateral and/or the records pertaining to the
Collateral (as described above) unless it shall have given Secured
Party thirty (30) days prior written notice thereof and shall have
taken all action deemed necessary or desirable by Secured Party to
cause its security interest in the Collateral to be perfected with the
priority required by this Security Agreement.
L. Books and Records; Information. Debtor shall keep accurate
and complete books and records of the Collateral including all payments
and payables in respect thereof and Debtor's business and financial
condition in accordance with generally accepted accounting principles
consistently applied. Debtor shall from time to time at the request of
Secured Party deliver to Secured Party such information regarding the
Collateral and Debtor as Secured Party may request, including, without
limitation, payments and payables in respect thereof, lists and
descriptions of the Collateral and evidence of the identity and
existence of the Collateral. Debtor shall mark its books and records to
reflect the security interest of Secured Party under this Security
Agreement.
M. Compliance with Agreements. Debtor shall comply in all
material respects with all mortgages, deeds of trust, instruments, and
other agreements binding on it or affecting its properties or business.
N. Compliance with Laws. Debtor shall comply with all
applicable laws, rules, regulations, and orders of any court or
governmental authority.
4. Rights of Secured Party. Debtor hereby appoints Secured Party as
Debtor's attorney-in-fact to do any act which Debtor is obligated by this
Security Agreement to do, to exercise
-3-
<PAGE>
all rights of Debtor in the Collateral and to do all things deemed necessary by
Secured Party to perfect the Security Interest and preserve, collect, enforce
and protect the Collateral, all at Debtor's cost and without any obligation on
Secured Party so to act. Secured Party shall not be liable for any act or
omission on the part of Secured Party, its officers, agents or employees, except
willful misconduct nor shall Secured Party be responsible for depreciation in
value of the Collateral or for preservation of rights against prior parties. The
foregoing rights and powers of Secured Party may be exercised before or after
default and shall be in addition to, and not a limitation upon, any rights and
powers of Secured Party given herein or by law, custom or otherwise, except as
otherwise expressly provided herein.
5. Events of Default. Debtor shall be in default under this Security
Agreement upon the occurrence and continuation of any of the following events or
conditions (each, an "Event of Default"):
(a) Default in the timely payment or performance of any
obligation, covenant or agreement contained herein, secured hereby or
otherwise made or owed to Secured Party;
(b) A material breach of or default under the License
Agreement by any party thereto;
(c) Any party to the License Agreement commences or becomes
the subject of any proceedings under any bankruptcy, reorganization,
comprise, arrangement, insolvency, readjustment of debts,
conservatorship, moratorium, dissolution, liquidation, or similar
debtor relief laws of any jurisdiction, whether now or hereafter in
effect, and, in the case of involuntary proceedings, such proceedings
are not dismissed, discharged, stayed or restrained within 60 days of
the commencement thereof, shall make an assignment for the benefit of
its creditors, or shall fail to pay its debts generally as they become
due;
(d) Any warranty, representation or statement made to Secured
Party by or in behalf of Debtor proves to have been false in any
material respect when made;
(e) Any material default in the payment or performance of any
obligation of Debtor to others under any loan, indenture, agreement or
undertaking in respect of borrowed money;
(f) Sale, loss, theft, destruction, encumbrance or
unauthorized transfer of any of the Collateral;
(g) Levy or seizure, or attachment of any of the Collateral;
(h) Judgment against Debtor in an amount greater than $50,000
which remains unpaid for thirty (30) days unless execution on such
judgment is subject to a stay pending appeal; and
(i) Any Event of Default as specified and defined in the Note.
-4-
<PAGE>
6. Remedies of Secured Party upon Default. When an Event of Default
occurs, and at any time thereafter, Secured Party may declare all or a part of
the Indebtedness immediately due and payable and may proceed to enforce payment
of same and to exercise any and all of the rights and remedies provided by the
Uniform Commercial Code ("Code") and any other applicable law, as well as all
other rights and remedies possessed by Secured Party under this Security
Agreement or otherwise at law or in equity, including, but not limited to,
notifying the account debtor on the Collateral to make any and all payments in
respect thereof to the Secured Party. Secured Party may also require Debtor to
assemble the Collateral and make it available to Secured Party at any place to
be designated by Secured Party which is reasonably convenient to both parties.
For purposes of the notice requirements of the Code, Secured Party and Debtor
agree that notice given at least five (5) calendar days prior to the related
action hereunder is reasonable. Secured Party shall be entitled to immediate
possession of the Collateral and all books and records evidencing same and shall
have authority to enter upon any premises, upon which said items may be
situated, and remove same therefrom. Expenses of retaking, holding, preparing
for sale, selling, or the like, shall include, without limitation, Secured
Party's reasonable attorneys' fees and all such expenses shall be recovered by
Secured Party before applying the proceeds from the disposition of the
Collateral toward the Indebtedness. To the extent allowed by the Code, Secured
Party may use its discretion in applying the proceeds of any disposition of the
Collateral and Debtor shall remain liable for any deficiency remaining after
such disposition. All rights and remedies of Secured Party hereunder are
cumulative and may be exercised singly or concurrently. The exercise of any
right or remedy shall not be a waiver of any other.
7. Waiver by Secured Party. No waiver by Secured Party of any right
hereunder or of any Event of Default by Debtor shall be binding upon Secured
Party unless provided in a written consent executed by Secured Party. Failure or
delay by Secured Party to exercise any right hereunder or waiver of any Event of
Default of Debtor shall not operate as a waiver of any other right of further
exercise of such right, or of any further default.
8. Parties Bound. Subject to Section 17 hereof, this Security Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective heirs, executors, administrators, legal representatives, successors,
receivers, trustees and assigns.
9. Governing Law. This Security Agreement shall be governed by and
construed and enforced in accordance with the Code (the definitions of which
apply herein) and other applicable laws of the State of New York without giving
effect to the principles of conflict of law of New York.
10. Notices. All notices, requests or communications required or
permitted to be given hereunder shall be in writing and shall be deemed to have
been properly given if (a) mailed by first-class United States mail, postage
prepaid, registered or certified with return receipt requested, (b) delivered by
a nationally recognized overnight delivery service with written confirmation of
delivery, (c) delivered in person to the intended addressee, or (d) sent by
facsimile transmission with confirmation of delivery. Any notice mailed as above
provided will be effective upon its deposit in the custody of the U.S. Postal
Service; all other notices will be effective upon receipt. All notices hereunder
shall be given at the following addresses:
-5-
<PAGE>
if to Debtor: Covol Technologies, Inc.
3280 North Frontage Road
Lehi, Utah 84043
Facsimile: (801) 768-4483
Attention: Stanley M. Kimball
if to Secured Party: Mountaineer Synfuel, L.L.C.
3280 North Frontage Road
Lehi, Utah 84043
Facsimile: (801) 766-1979
Attention: Harlen M. Hatfield
with copies to: MSDW Synfuels II, Inc.
1221 Avenue of the Americas
23rd Floor
New York, New York 10020
Facsimile: (212) 762-6912
Attention: Debra M. Aaron
and
Fannie Mae
3900 Wisconsin Avenue, N.W.
Washington, D.C. 20016-2892
Facsimile: (201) 752-6088
Attention: William E. Einstein
Any such entity may change its address for notice hereunder to any other
location within the continental United States by giving 30 days prior notice
thereof to each other such entity in accordance with this Section 10.
11. Cumulative Rights. All rights of Secured Party under this Security
Agreement and all related documents are cumulative of each other and of every
other right which Secured Party may otherwise have at law or in equity or under
any other contract or other writing for the enforcement of the security interest
herein or the collection of the Indebtedness. The exercise of one or more rights
shall not prejudice or impair the concurrent or subsequent exercise of other
rights.
12. Continuing Security Interest; Obligations Absolute. This Security
Agreement constitutes a continuing security interest in the Collateral, and
shall remain in full force and effect until performance and indefeasible payment
in full of the Indebtedness. The obligations of Debtor under this Security
Agreement shall be absolute and unconditional and shall not be released,
discharged, reduced or in any way impaired by any circumstance whatsoever,
including without limitation any amendment, modification, extension or renewal
of this Security Agreement, the Indebtedness or any document or instrument
evidencing, securing or otherwise relating to the Indebtedness, or any release
or subordination of collateral, or any waiver, consent, extension, indulgence,
compromise, settlement or other action or inaction in respect of this Security
Agreement, the Indebtedness or any document or instrument evidencing, securing
or otherwise relating to the
-6-
<PAGE>
Indebtedness or any exercise or failure to exercise any right, remedy, power or
privilege in respect of the Indebtedness.
13. Amendment/Modification/Consent. This Security Agreement shall not
be amended, supplemented, or otherwise modified, except by written consent
signed by Secured Party and Debtor. No consent of Secured Party hereunder shall
be effective unless approved in writing by MSDW Synfuels II, Inc. and Fannie
Mae.
14. Severability. If any provision of this Security Agreement or any
related documents is held to be illegal, invalid or unenforceable under present
or future laws or regulations, that provision will be fully severable. The
affected instrument, document or agreement shall be construed and enforced as if
any the severed provision had never been a part thereof, and the remaining
provisions shall remain in full force and effect and shall not be affected by
the severed provision or by its severance therefrom. In lieu of the severed
provision, there shall be added automatically as a part of the affected
instrument, document or agreement a provision that is legal, valid and
enforceable, and as similar in terms to the severed provision as may be
possible.
15. Construction. If there is any conflict between the provisions
hereof and the provisions of the Indebtedness, the latter shall control. The
captions herein are for convenience of reference only and not for definition or
interpretation.
16. Waiver of Debtor. Debtor hereby waives presentment, demand, notice
of dishonor, protest, and notice of protest, and all other notices with respect
to collection, or acceleration of maturity, of the Collateral and Indebtedness.
17. Assignment. This Security Agreement, the rights, powers and
interests held by Secured Party hereunder may be transferred and assigned by
Secured Party, in whole or in part, at such time and upon such terms as Secured
Party may deem advisable, without the consent of Debtor. Debtor will not assign
any of its rights, powers or interests hereunder without the prior written
consent of Secured Party.
18. ENTIRE AGREEMENT. THIS WRITTEN AGREEMENT AND THE OTHER DOCUMENTS
REFERENCED HEREIN OR CONTEMPLATED HEREBY REPRESENT THE FINAL AGREEMENT BETWEEN
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS AMONG THE PARTIES.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereby execute this Security Agreement
effective as of the date first above written.
DEBTOR:
COVOL TECHNOLOGIES, INC.,
a Delaware corporation
By:/Stanley M. Kimball/
----------------------------------
Printed Name: Stanley M. Kimball
Its: President
SECURED PARTY:
MOUNTAINEER SYNFUEL, L.L.C.,
a Delaware limited liability company
By: /Harlan M. Hatfield/
----------------------------------
Printed Name: Harlan M. Hatfield
Its: Vice President
-8-
Prepared by, and after recording return to:
Michael S. Kosmas, Esquire
Jones, Day, Reavis & Pogue
1450 G Street, N.W., Suite 600
Washington, D.C. 20005
LEASEHOLD CREDIT LINE
DEED OF TRUST
AND SECURITY AGREEMENT
THIS LEASEHOLD CREDIT LINE DEED OF TRUST AND SECURITY
AGREEMENT (this "Deed of Trust"), dated as of the 8th day of December, 1998,
from COVOL TECHNOLOGIES, INC., a Delaware corporation, having an address at 3280
North Frontage Road, Lehi, Utah 84043 (the "Borrower"), to ________________ and
________________, each a resident of West Virginia, having an address at
_____________________________________________________________ (collectively,
together with their successors in such capacity, the "Trustee"), for the benefit
of MOUNTAINEER SYNFUEL, L.L.C., a Delaware limited liability company, having an
address at 3280 North Frontage Road, Lehi, Utah 84043 (the "Beneficiary").
WITNESSETH:
WHEREAS, pursuant to a Deed of Ground Lease dated as of May 5,
1998 between Upshur Property, Inc. and the Borrower (the "Ground Lease"), the
Borrower has acquired a leasehold estate in certain real property located in
Upshur County, West Virginia, described on Exhibit A attached hereto (the "Real
Property"). A Memorandum of Lease setting forth certain information with respect
to the Ground Lease is recorded immediately prior hereto.
WHEREAS, pursuant to a Promissory Note dated of even date
herewith in an original maximum aggregate principal amount of NINE MILLION SEVEN
HUNDRED FIFTY THOUSAND DOLLARS ($9,750,000.00) (the "Note"), the Borrower is
indebted to the Beneficiary as more fully set forth therein. The amounts due
from the Borrower to the Beneficiary pursuant to the Note are sometimes referred
to hereinafter as the "Obligations".
THIS IS A CREDIT LINE DEED OF TRUST SECURING THE
PAYMENT OF THE MAXIMUM PRINCIPAL AMOUNT OF $9,750,000.00
WA: 1043170v4
197770-600002
Printed: 12-23-98 12:53
1
<PAGE>
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and FOR THE PURPOSE OF
SECURING the Obligations (the original maximum aggregate amount of principal to
be secured at any one time by this Deed of Trust being $9,750,000.00), and the
full and punctual performance and observance by the Borrower of all the
covenants, agreements, terms and conditions set forth herein, the Borrower does
hereby irrevocably grant, sell, release, convey, warrant, assign, transfer,
mortgage, pledge, set over and confirm unto the Trustee, its successors and
assigns, IN TRUST, WITH POWER OF SALE, for the benefit and security of the
Beneficiary, under and subject to the terms and conditions hereinafter set
forth, the following described property, to wit:
All of the right, title and interest of the Borrower under the
Ground Lease and in and to the Real Property (collectively, the "Property");
TOGETHER WITH all interests, estates or other claims, both in
law and in equity, which the Borrower now has or may hereafter acquire in (i)
the Property, (ii) all easements, rights-of-way and rights used in connection
therewith or as a means of access thereto, and (iii) all tenements,
hereditaments and appurtenances in any way belonging, relating or appertaining
thereto;
TOGETHER WITH all estate, right, title and interest of the
Borrower now owned or hereafter acquired, in and to any land lying within the
right-of-way of any street, open or proposed, adjoining to the Property, and any
and all sidewalks, alleys, strips of land and gores adjacent to or used in
connection therewith;
TOGETHER WITH all estate, right, title and interest of the
Borrower, now owned or hereafter acquired, in and to any and all buildings and
other improvements now or hereafter erected on the Property (collectively, the
"Improvements");
TOGETHER WITH all estate, right, title and interest of the
Borrower now owned or hereafter acquired, in and to all inventory, machinery,
apparatus, equipment, materials, supplies, goods, fittings, fixtures and
articles of personal property now or hereafter located on or at the Property or
used in connection therewith (including in connection with the construction,
renovation, or improvement thereof) and all additions, and accessions thereto,
replacements therefor and proceeds and profits thereof (collectively, the
"Personal Property");
TOGETHER WITH all estate, claim, demand, right (including all
rights to possession and use, all options and other rights to give consents,
modify, amend, extend, renew, terminate or purchase or sell), title and interest
of the Borrower under all contracts, agreements, understandings or arrangements,
whether written or oral, now or hereafter in effect relating to the development,
construction, reconstruction, repair, alteration, addition to, improvement,
replacement, use, operation or management of the Property and as lessee or
lessor under any leases or occupancy arrangements relating to the Property,
whether oral or written, now or hereafter in effect (all of the foregoing,
collectively, the "Agreements"), provided that any of the
WA: 1043170v4
197770-600002
Printed: 12-23-98 12:53
2
<PAGE>
Agreements that by their terms or by operation of law would become void,
voidable or revocable if mortgaged, pledged or assigned hereunder or if a
security interest therein were granted hereunder are expressly excepted and
excluded from the lien of this Deed of Trust;
TOGETHER WITH all right, claim, demand, title and interest of
the Borrower in, to and under all permits, approvals, certificates, variances,
orders, exemptions and other authorizations, including any condominium permits,
approvals, certificates, variances, orders, assumptions and other authorizations
now or hereafter issued, made or granted with respect to the development,
construction, reconstruction, repair, alteration, addition, improvement,
replacement, use, operation or management of the Property (collectively, the
"Permits"), provided that any of the Permits that by their terms or by operation
of law would become void, voidable or revocable if mortgaged, pledged or
assigned hereunder or if a security interest therein were granted hereunder are
expressly excepted and excluded from the lien of this Deed of Trust;
TOGETHER WITH all reversion or reversions, remainder or
remainders, rents, revenues, proceeds, issues, profits, royalties, income and
other benefits of the Property, the Improvements, the Personal Property and the
Agreements, and the Beneficiary is hereby authorized to collect and receive the
same, to give proper receipts and acquittances therefor and to apply the same to
the payment of the Obligations, notwithstanding the fact that the same may not
then be due and payable;
TOGETHER WITH all right, title and interest of the Borrower in
and to (i) all proceeds of the insurance required to be maintained under section
1.04 of this Deed of Trust and (ii) all awards heretofore or hereafter made to
the Borrower with respect to any part of the Property, the Improvements, the
Agreements, or the Personal Property as the result of the exercise of the power
of eminent domain, including any awards for changes of the grades of streets, or
as the result of any other damage to any part of the Property, the Improvements,
the Agreements or the Personal Property for which compensation shall be given by
any governmental authority (a "Condemnation"), and the Trustee is hereby
authorized to collect and receive the proceeds thereof to the extent of the
right, title and interest of the Borrower, to give proper receipts and
acquittances therefor, and, at the direction of the Beneficiary, to apply the
same to the payment of the Obligations, notwithstanding the fact that the same
may not then be due and payable;
TOGETHER WITH any and all air rights, development rights,
zoning rights or other similar rights or interests which benefit or are
appurtenant to the Property or the Improvements or both and any proceeds arising
therefrom;
Permitting the said Borrower to use and occupy the Property
and the Improvements, until an Event of Default shall have occurred and be
continuing;
All of the foregoing property is sometimes herein referred to
as the "Trust Estate".
WA: 1043170v4
197770-600002
Printed: 12-23-98 12:53
3
<PAGE>
TO HAVE AND TO HOLD the Trust Estate, with all privileges and
appurtenances thereunto belonging, to the Trustee and its successors in trust
and, for the benefit of the Beneficiary and its successors and assigns forever.
PROVIDED ALWAYS, if the Obligations shall be paid in full
according to the terms and provisions hereof and of the Note, then this Deed of
Trust and the lien and estate hereby granted shall cease, determine and be void.
TO PROTECT THE SECURITY OF THIS DEED OF TRUST, THE BORROWER
HEREBY COVENANTS AND AGREES AS FOLLOWS:
ARTICLE I
Particular Covenants and
Agreements of the Borrower
Section 1.01. Payment of the Obligations; Title, etc. The
Borrower shall pay the Obligations according to the terms of the Note. The
Borrower warrants and represents that the Borrower (i) is lawfully possessed of
a leasehold estate in the Property and is lawfully possessed of a fee title
estate in and to the Improvements and the Personal Property, subject to no liens
or encumbrances, and (ii) has full power and lawful authority to grant, bargain,
sell, release, convey, warrant, assign, transfer, mortgage, pledge, set over and
confirm unto the Trustee and Beneficiary all right, title and interest of the
Borrower in and to the Trust Estate. The Borrower also warrants and represents
that this Deed of Trust is given to secure indebtedness incurred in connection
with the carrying on of a commercial enterprise. Subject to the rights of the
Borrower under this Deed of Trust, the Borrower shall forever defend the title
to the Trustee in and to the Trust Estate and the validity of the lien and
estate hereof against the claims and demands of all persons whomsoever.
Section 1.02. Further Assurances.
(a) The Borrower shall execute, acknowledge and deliver, from
time to time, such further instruments as the Trustee or the Beneficiary may
reasonably require to accomplish the purposes of this Deed of Trust.
(b) The Borrower, immediately upon the execution and delivery
of this Deed of Trust, and thereafter from time to time, shall cause this Deed
of Trust, each supplement and amendment hereof (collectively, the "Recordable
Document"), to be filed, registered or recorded and refiled, re-registered or
re-recorded in such manner and in such places as may be required by any present
or future law in order to publish notice of and perfect the lien and estate of
this Deed of Trust upon the Trust Estate. The Borrower shall, from time to time,
perform or cause to be performed any other act as required by law and shall
execute or cause to be executed any and all
WA: 1043170v4
197770-600002
Printed: 12-23-98 12:53
4
<PAGE>
further instruments (including financing statements, continuation statements and
similar statements with respect to any Recordable Document) (collectively, "UCC
Documents") reasonably requested by the Trustee or the Beneficiary for such
purposes. Without limiting the foregoing, not more than six months nor less than
three months prior to the date on which any continuation statements are required
to be filed with respect to any Recordable Document, the Borrower shall file all
such continuation statements and send copies evidencing such filing to the
Trustee and the Beneficiary. If the Borrower shall fail to execute any UCC
Document by the date three (3) months prior to the date on which any
continuation statement is required to be filed, the Beneficiary shall be and is
hereby irrevocably appointed the agent and attorney-in-fact of the Borrower to
execute such UCC Document.
(c) The Borrower shall pay all filing, registration and
recording fees, all refiling, re-registration and re-recording fees, and all
expenses incident to the execution, acknowledgment and delivery of the
Recordable Documents, and all Federal, State, county and municipal stamp taxes
and other taxes, duties, imposts, assessments and charges arising out of or in
connection with the execution, acknowledgment and delivery of the Recordable
Documents.
(d) The Borrower has not caused, accepted or permitted, and
shall not cause, accept or knowingly permit, the disposal, release or threatened
release on the Property of any hazardous substance, as that term is defined in
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, 42 U.S.C. ss. 9601, et seq., and to Borrower's knowledge no other owner,
user or operator of the Property, past or present, has caused, accepted or
permitted the disposal, release or threatened release of any hazardous substance
on the Property.
Section 1.03. Compliance with Legal Requirements. The Borrower
shall comply with all laws, ordinances, regulations, covenants, conditions and
restrictions now or hereafter affecting the Trust Estate or any part thereof
(collectively, "Legal Requirements"); provided, however, that if the Borrower
contests in good faith and by appropriate proceedings the validity or
applicability of any Legal Requirement so that the enforcement thereof is stayed
or provides the Beneficiary with security in such amount and in such form as the
Beneficiary may require, in its reasonable discretion, then, in either such
case, compliance with the Legal Requirement in question shall be suspended
during the pendency of such contest.
Section 1.04. Required Insurance. The Borrower shall at all
times (i) keep the Trust Property insured for the benefit of Beneficiary, as its
interests may appear, in an amount not less than one hundred percent (100%) of
the full replacement cost of such Trust Property, (ii) carry and maintain or
cause others to carry and maintain such liability and indemnity insurance as may
be required from time to time by the Beneficiary, and (iii) carry and maintain
or cause others to carry and maintain workers' compensation and disability
insurance to the fullest extent required by law. Upon request of the
Beneficiary, the originals of all such policies and renewals thereof, together
with receipts satisfactory to the Beneficiary evidencing payment thereof, shall
be delivered to and held by the Beneficiary.
WA: 1043170v4
197770-600002
Printed: 12-23-98 12:53
5
<PAGE>
Section 1.05. Insurance Proceeds. (a) After the happening of
any casualty to the Property, the Improvements or the Personal Property or any
part thereof, the Borrower shall give prompt notice thereof to the Beneficiary
and the Trustee.
(b) Any insurance proceeds shall be paid over promptly to the
Beneficiary, and the Beneficiary, at its sole discretion, may apply such sums,
in whole or in part, to the repair, restoration and replacement of the Property,
the Improvements or the Personal Property, or to the payment of the indebtedness
secured by this Deed of Trust in such order of priority as the Beneficiary shall
determine.
Section 1.06. Assignments of Policies Upon Foreclosure. In the
event of foreclosure of this Deed of Trust or other transfer of title or
assignment of the Trust Estate in extinguishment, in whole or in part, of the
Obligations, to the extent permitted by the Borrower's policies of insurance,
all right, title and interest of the Borrower in and to all policies of
insurance shall inure to the benefit of and pass to the successors in interest
to the Borrower or the purchaser or grantee of the Trust Estate or any part
thereof.
Section 1.07. Indemnification; Waiver of Offset. (a) If the
Trustee or the Beneficiary is made a party defendant to any litigation
concerning this Deed of Trust or the Trust Estate or any part thereof or
interest therein, or concerning the occupancy thereof by the Borrower, and such
litigation did not arise as a result of the gross negligence or willful
misconduct of the Trustee or the Beneficiary, as the case may be, then the
Borrower shall indemnify, defend and hold the Trustee or the Beneficiary, as the
case may be, harmless from and against all liability by reason of said
litigation, including reasonable attorneys' fees and expenses in any such
litigation, whether or not any such litigation is prosecuted to judgment. If the
Trustee or the Beneficiary in good faith commences an action against the
Borrower to enforce any of the terms hereof or because of the breach by the
Borrower of any of the terms hereof, or for the recovery of any of the
Obligations, then the Borrower shall, to the extent permitted by law, pay to the
Trustee or the Beneficiary, as the case may be, its reasonable attorneys' fees
and expenses, and the right to such attorneys' fees and expenses shall be deemed
to have accrued on the commencement of such action, and shall be enforceable
whether or not such action is prosecuted to judgment, provided that the Borrower
shall not be liable for any amounts to be paid in settlement unless Borrower has
consented in writing to such settlement, which consent shall not be unreasonably
withheld. If a Default shall occur and be continuing, the Trustee or the
Beneficiary may employ an attorney or attorneys to protect its rights hereunder,
and in the event of such employment following any Default by the Borrower, the
Borrower shall, to the extent permitted by law, pay the reasonable attorneys'
fees and expenses incurred by the Trustee or the Beneficiary, as the case may
be, whether or not an action is actually commenced against the Borrower by
reason of such Default. The Borrower will assume the defense of any action
against the Trustee or the Beneficiary covered by the indemnification set forth
in this Section, including the retaining of counsel selected by Borrower and the
payment by the Borrower of reasonable counsel's fees and expenses relating to
such defense and of the aggregate amount to be paid at settlement of any
litigation if such settlement is effected with the written consent of the
WA: 1043170v4
197770-600002
Printed: 12-23-98 12:53
6
<PAGE>
Borrower. The Trustee and the Beneficiary shall have the right to retain
separate counsel in any such action and to participate in the defense thereof,
but the fees and expenses of such counsel shall be at the expense of the Trustee
and/or the Beneficiary unless the retaining of such counsel has been
specifically authorized in writing by the Borrower or the use of counsel chosen
by the Borrower to represent the Trustee and/or the Beneficiary would present
such counsel with a conflict of interest.
(b) The Borrower hereby waives any and all right to claim or
recover against the Trustee or the Beneficiary, or their respective officers,
employees, agents and representatives, for loss of or damage to the Borrower,
the Trust Estate, the property of the Borrower or the property of others under
the control of the Borrower from any cause insured against or required to be
insured against under this Deed of Trust unless arising from the gross
negligence or willful misconduct of the Trustee or the Beneficiary.
Section 1.08. Impositions. The Borrower shall pay, or, where a
third party is responsible for payment, cause the payment by third parties,
before any fine, penalty, interest or cost attaches thereto, all taxes,
assessments, water and sewer rates, utility charges and all other governmental
or nongovernmental charges or levies now or hereafter assessed or levied against
the Property, the Improvements, the Personal Property or any other part of the
Trust Estate or upon the lien or estate of the Trustee or the Beneficiary
therein (collectively, "Impositions"), as well as all claims for labor,
materials or supplies which, if unpaid, might by law become a prior lien
thereon, and as soon as possible after request by the Trustee or the Beneficiary
shall cause receipts showing payment of any of the foregoing to be exhibited;
provided, however, that if by law any Imposition may be paid in installments
(whether- or not interest shall accrue on the unpaid balance thereof), such
Imposition may be paid in installments (together with accrued interest on the
unpaid balance thereof) as the same respectively become due, before any fine,
penalty or cost attaches thereto; provided further, however, that if the
Borrower or other party responsible for payment contests in good faith and by
appropriate proceedings the validity or applicability of any Imposition or
claims for labor, materials or supplies and provides to the Beneficiary security
in such amount and in such form as the Beneficiary may reasonably require, then,
in either such case, compliance with the Imposition in question may be suspended
during the pendency of such contest.
Section 1.09. Limitations of Use. Without the consent of the
Beneficiary, the Borrower shall not initiate, join in or consent to any change
in any private restrictive covenant, zoning ordinance or other public or private
restrictions limiting or defining the uses which may be made of the Property and
the Improvements or any part thereof.
Section 1.10. Encumbrances. The Borrower shall discharge all
existing liens and encumbrances on the Property.
Section 1.11. Estoppel Certificates. The Borrower shall upon
request by the Beneficiary, but not more often than twice per calendar year,
within twenty (20) days of such
WA: 1043170v4
197770-600002
Printed: 12-23-98 12:53
7
<PAGE>
request furnish to the Beneficiary a written statement, duly acknowledged, of
the unpaid amount of the Obligations and whether any offsets or defenses exist
against the Obligations.
Section 1.12. Actions by Trustee and/or Beneficiary to Protect
Trust Estate. If the Borrower shall fail to (i) perform and observe any of the
terms, covenants or conditions required to be performed or observed by it; (ii)
cause the insurance required by section 1.04 to be effected; (iii) make (or
cause to be made) the payments required by section 1.02(c) or section 1.08; or
(iv) perform or observe any other covenants or agreements to be performed or
observed by the Borrower hereunder, the Trustee or the Beneficiary may, without
obligation so to do, at any time after ten (10) days' written notice to the
Borrower (except in any emergency) and for so long as such failure by the
Borrower continues, effect, pay, perform or observe the same. Each sum,
including reasonable attorneys' fees, so expended by the Trustee or Beneficiary
or expended to sustain the lien and estate of this Deed of Trust or its
priority, or to protect or enforce any of the rights of the Trustee or the
Beneficiary under this Deed of Trust, shall (together with interest thereon from
and including the date of expenditure of such sum until the same shall be paid
in full at the rate of ten percent (10%) per annum (the "Default Rate")) be a
lien on the Trust Estate, be deemed to be added to the Obligations, and be paid
by the Borrower within ten (10) days after demand therefor. In any action or
proceeding to enforce this Deed of Trust or to recover or collect the
Obligations, the provisions of law respecting the recovery of costs,
disbursements and allowances shall prevail unaffected by this covenant.
Section 1.13. Condemnation. (a) If the Property, the
Improvements or the Personal Property or any part thereof or interest therein,
are taken or damaged by reason of any Condemnation, or if the Borrower receives
any notice or other information regarding such proceeding, the Borrower shall
give prompt notice thereof to the Beneficiary and the Trustee.
(b) Subject to the rights of the landlord under the Ground
Lease with respect to compensation in connection with any taking of all or part
of the Property, all compensation, awards and other payments or relief in any
condemnation (collectively, "Condemnation Proceeds") shall, at the option of the
Beneficiary, be distributed first to the Beneficiary to be applied to the
payment of the indebtedness secured by this Deed of Trust in such order of
priority as the Beneficiary shall determine. The Beneficiary shall be entitled
at its option to participate in any compromise or settlement in connection with
such Condemnation, and the Borrower shall within ten (10) Business Days after
request therefor, reimburse the Beneficiary for all out-of-pocket expenses
(including reasonable attorneys' fees) incurred by the Beneficiary in connection
with such participation. The Borrower shall not make any compromise or
settlement in connection with any Condemnation without the approval of the
Beneficiary.
Section 1.14. Additional Security. If the Beneficiary at any
time holds additional security for the Obligations, and if an Event of Default
shall have occurred and be continuing, the Beneficiary may enforce the sale
thereof or otherwise realize upon the same, at its option, either before or
concurrently herewith or after a sale is made hereunder.
WA: 1043170v4
197770-600002
Printed: 12-23-98 12:53
8
<PAGE>
Section 1. 15. Disposition of Trust Estate. Notwithstanding
any other provision hereof, and except with respect to the sale of inventory in
the ordinary course of business, the Borrower shall not sell, assign, transfer,
pledge or otherwise transfer or encumber or dispose of all or part of the Trust
Estate, whether voluntary or by operation of law, except with the prior written
consent of the Beneficiary.
Section 1.16. Subordination of Leases. All leases or subleases
entered into by the Borrower (or any other entity representing the Borrower or
succeeding to the Borrower's position) in respect of the Property shall be
subordinate to and subject to this Deed of Trust and shall contain a clause to
that effect.
Section 1.17. Hazardous Materials; Contamination.
(a) The Borrower represents, warrants and covenants that (i)
the Trust Estate and the business operations occurring thereon comply with all
applicable federal, state and local environmental and hazardous waste laws and
regulations; (ii) no enforcement actions are pending or threatened against the
Trust Estate; (iii) to the best of its knowledge, during the period of its
ownership of the Trust Estate, there has been no disposal, release or threatened
release of hazardous substances, wastes or materials or environmental
contaminants on, from or under the Trust Estate; (iv) it has no knowledge of
(and has no reason to have knowledge of) any presence, disposal, release or
threatened release of any hazardous substances, wastes or materials or
environmental contaminants on, from or under the Trust Estate that may have
occurred prior to the Borrower's acquisition of title to the Trust Estate; (v)
neither it nor to the best of its knowledge any lessee under any lease has
received any notice from any governmental agency of a violation of any
environmental or hazardous waste law or regulation; (vi) it has not used and
does not intend to use or to allow the Trust Estate to be used in a manner which
would violate applicable federal, state and local environmental or hazardous
waste laws or regulations; (vii) during the period of its ownership of the Trust
Estate there has been no litigation or administrative enforcement actions or
proceedings brought or, to its knowledge, threatened to be brought, nor has the
Borrower reached any settlements with anyone alleging the presence, disposal,
release or threatened release of any hazardous waste, substance or material or
any environmental contaminant on, from or under the Trust Estate and (viii) it
shall keep or cause the Trust Estate to be kept free of hazardous wastes. The
terms "disposal", "release", "threatened release", "hazardous substances",
"hazardous wastes" "hazardous materials" and "environmental contaminants" mean
and include any hazardous, toxic or dangerous waste, substance, or material, or
any disposal, discharge, release, or threatened release, or any term defined as
such in (or for purposes of) the federal Comprehensive Environmental Response,
Compensation, and Liability Act, as amended, the Resources Conservation and
Recovery Act, as amended, the Federal Clean Water Act, as amended, the Federal
Clean Air Act, as amended, the Emergency Planning and Community Right to Know
Act, as amended, or any other federal, state or local statute, law, ordinance,
code, rule, regulation, order or decree regulating, relating to, or imposing
liability or standards of conduct concerning, any hazardous, toxic or dangerous
waste, substance or material, as now or at any time hereafter may be in effect.
WA: 1043170v4
197770-600002
Printed: 12-23-98 12:53
9
<PAGE>
(b) The Borrower shall comply with all laws, ordinances,
orders, rules and regulations of all federal, state, county and municipal
governments and appropriate departments, commissions, boards and officers
thereof which now are or at any time in the future may be (i) applicable to the
Trust Estate or (ii) related to asbestos, radon, environmental conditions,
environmental contaminants, toxic wastes, hazardous wastes, hazardous materials,
solid wastes or similar matters (collectively, "Legal Requirements"). The
Borrower shall indemnify and hold harmless the Trustee or the Beneficiary and
their affiliates from and against all loss, cost, liability and expense. (x) in
any manner arising out of or related to any violation of or failure to comply
with any Legal Requirement, (y) imposed upon the Trustee or the Beneficiary, an
affiliate of the Trustee or the Beneficiary or the Borrower by any Legal
Requirement or (z) in any manner arising out of or related to the presence, use,
storage, disposal or transport of any hazardous materials or environmental
contaminants found in, on or under, or affixed to, or emanating from, the Trust
Estate (including, without limitation, (i) all foreseeable and all unforeseeable
damages, directly or indirectly arising out of the use, generation, storage or
disposal of hazardous materials or environmental contaminant by the Borrower or
any prior owner or operator of the Trust Estate, and (ii) all costs of any
required or necessary repair, clean-up or detoxification and the preparation of
any closure or other required plans), whether such action is required or
necessary prior to or following transfer of title to the Trust Estate, to the
full extent that such action is attributable, directly or indirectly, to the
presence or use, generation, storage, release, threatened release or disposal of
hazardous materials or environmental contaminants by any person on the Trust
Estate; provided that this. sentence shall not apply to any loss, cost,
liability or expense arising from the act of the Trustee or Beneficiary or the
failure of the Trustee or the Beneficiary to act when legally required to do so.
The foregoing indemnity shall survive the repayment in full of the Obligations.
If any action or proceeding is brought against the Beneficiary in respect of or
in connection with any of the foregoing indemnified matters, the Borrower shall
upon notice from the Beneficiary defend such action or proceeding by counsel
satisfactory to the Beneficiary. The Trust Estate shall at all times comply with
all zoning, subdivision regulations, building restrictions and other Legal
Requirements.
(c) The Borrower, as promptly as possible upon request, but
only if the Beneficiary has a good faith reason to believe that a problem
exists, shall furnish to the Beneficiary a radon and/or other hazardous waste
and/or other environmental contaminant inspection report, at the cost and
expense of the Borrower, covering the Trust Estate (i) in form, scope and
substance satisfactory to the Beneficiary and (ii) prepared by an inspector
selected and commissioned by the Beneficiary. At the election of the
Beneficiary, the Borrower shall remove, encapsulate or otherwise deal with any
radon and/or other hazardous waste and/or other environmental contaminant on the
Trust Estate at the Borrower's cost and expense in a manner reasonably
satisfactory to the Beneficiary.
Section 1.18. Deed of Trust Secures Future Advances. This Deed
of Trust is a credit line deed of trust for the purposes of Section 38-1-14 of
the West Virginia Code, and the aggregate principal amount of the loans or
indebtedness secured by this Deed of Trust shall not exceed the maximum
principal amount of $9,750,000.00, and this Deed of Trust is also security
WA: 1043170v4
197770-600002
Printed: 12-23-98 12:53
10
<PAGE>
for the payment of interest on such principal sums and for taxes, insurance
premiums and other obligations, including interest thereon, undertaken by the
Beneficiary or the Trustee (to the extent permitted by law) pursuant to the
provisions of this Deed of Trust. THE INDEBTEDNESS SECURED HEREBY PROVIDES FOR
NON-OBLIGATORY FUTURE ADVANCES PURSUANT TO THE TERMS OF THE NOTE NOT TO EXCEED
THE MAXIMUM PRINCIPAL AMOUNT OF $9,750,000.00. ALL NOTICES OF LIENS, CLAIMS OR
ENCUMBRANCES AGAINST THE PROPERTY COVERED HEREBY SHALL BE SENT TO THE
BENEFICIARY AT THE ADDRESS SPECIFIED IN THE FIRST PARAGRAPH OF THIS DEED OF
TRUST.
ARTICLE II
Security Agreement
Section 2.01. Creation of Security Interest in the Trust
Estate. The Borrower hereby grants to the Beneficiary a security interest in
such portion of the Trust Estate that is not real property (including all of the
Personal Property, the Agreements and the Permits) for the purpose of securing
the Obligations.
Section 2.02. Representations and Warranties of the Borrower.
The Borrower hereby warrants, represents and covenants that: (a) the Personal
Property is not used or bought for personal, family or household purposes; and
(b) this Deed of Trust constitutes a Security Agreement as that term is used in
the Uniform Commercial Code in effect in the State of West Virginia.
Section 2.03. Fixture Fling. This instrument is to be filed
for record in the real estate records of the County in which the Real Property
is located so as to serve as a fixture filing pursuant to West Virginia Code
Chapter 46, Article 9, Section 402.
Section 2.04. Technology License. The Borrower hereby grants
to the Beneficiary an irrevocable non-exclusive, royalty-free license to use the
technology of the Borrower described on Exhibit B hereto at the Property at any
and all times, but otherwise subject to the terms and conditions of the May 5,
1998 Technology License and Binder Purchase Agreement between the Borrower and
the Beneficiary (i) during which an Event of Default has occurred and is
continuing, or (ii) following a foreclosure pursuant to this Deed of Trust until
such time as the Note and all obligations of the Borrower under the Deed of
Trust and under any judgement obtained with respect to the Note or this Deed of
Trust have been satisfied in full.
WA: 1043170v4
197770-600002
Printed: 12-23-98 12:53
11
<PAGE>
ARTICLE III
Events of Default; Remedies; Etc.
Section 3.01. Event of Default. Borrower shall be in default
under this Agreement upon the occurrence and continuation of any of the
following events or conditions (each, an "Event of Default"):
(a) an "Event of Default" as specified and defined in the Note
or in the Security Agreement of even date herewith between the Borrower and
Mountaineer Synfuel, L.L.C.
(b) any material default in the performance of any obligation
of Borrower hereunder; and
(c) levy or seizure, or attachment of any of the Trust Estate.
Section 3.02. Remedies.
(a) If an Event of Default shall have occurred and be
continuing, this Deed of Trust may, to the extent permitted by law, be enforced
as a deed of trust and the Trustee or the Beneficiary may exercise any right,
power or remedy permitted to it hereunder or by law, and, without limiting the
generality of the foregoing, the Trustee or the Beneficiary may, to the extent
permitted by law:
(i) enter and take possession of the Trust Estate or
any part thereof, exclude the Borrower and all persons
claiming under the Borrower whose claims are junior to this
Deed of Trust, wholly or partly therefrom, and use, operate,
manage and control the same as the Beneficiary shall deem
best, and upon such entry, from time to time at the expense of
the Trust Estate, make all such repairs, replacements,
alterations, additions or improvements to the Trust Estate or
any part thereof as the Beneficiary may deem proper; and
(ii) personally or by agents, with or without entry,
if the Beneficiary shall deem it advisable:
(a) exercise THE POWER OF SALE granted by
this Deed of Trust and sell all or any portion of the
Trust Estate in accordance with applicable West
Virginia law for cash in hand on the day of sale,
unless otherwise
WA: 1043170v4
197770-600002
Printed: 12-23-98 12:53
12
<PAGE>
specified by the Beneficiary to the highest bidder at
public auction at a sale or sales held at such place
or places and time or times and upon such notice and
otherwise in such manner as may be required by law,
or in the absence of any such requirement, as the
Beneficiary may deem appropriate and from time to
time adjourn any such sale by announcement at the
time and place specified for such sale or for such
adjourned sale without further notice, except such as
may be required by law;
(b) proceed to protect and enforce its
rights under this Deed of Trust, by suit for specific
performance of any covenant contained herein, or in
aid of the execution of any power granted herein, or
for the foreclosure of this Deed of Trust and the
sale of the Trust Estate under the judgment or decree
of a court of competent jurisdiction, or for the
enforcement of any other right as the Trustee or the
Beneficiary shall deem most effectual for such
purpose or;
(c) exercise any or all of the remedies
available to a secured party under the applicable
Uniform Commercial Code, including:
(1) either personally or by means of
a court appointed receiver, take possession
of all or any of the Trust Estate that is
not real property and exclude therefrom the
Borrower and all persons claiming under the
Borrower and thereafter hold, store, use,
operate, manage, maintain and control, make
repairs, replacements, alterations,
additions and improvements to and exercise
all rights and powers of the Borrower in
respect of all or any of the Trust Estate
that is not real property. If the
Beneficiary demands or attempts to take
possession of all or any of the Trust Estate
that is not real property in the exercise of
any rights hereunder, the Borrower shall
promptly turn over and deliver complete
possession thereof to the Beneficiary;
(2) without notice to or demand upon
the Borrower make such payments and do such
acts as the Beneficiary may deem necessary
to protect its security interest in all or
any of the Trust Estate that is not real
property including paying, purchasing,
contesting or compromising any encumbrance
which is prior to or superior to the
security interest granted hereunder, and in
exercising any such powers or authority to
pay all expenses incurred in connection
therewith;
(3) require the Borrower to assemble
all or any of the Trust Estate that is not
real property at a place designated by the
WA: 1043170v4
197770-600002
Printed: 12-23-98 12:53
13
<PAGE>
Beneficiary and convenient to both parties,
and promptly to deliver it to the
Beneficiary, or its designated agent or
representative. The Beneficiary, and its
agents and representatives, shall have the
right to enter upon the premises and
property of the Borrower to exercise the
Beneficiary's rights hereunder;
(4) sell, lease or otherwise dispose
of all or any of the Trust Estate that is
not real property at public sale, with or
without having all or any of the Trust
Estate that is not real property at the
place of sale, and upon such terms and in
such manner as the Beneficiary may
reasonably determine (the Trustee or the
Beneficiary may be a purchaser at any such
sale); and
(5) the Beneficiary shall give the
Borrower at least ten (10) days' prior
notice of the time and place of any public
sale of all or any of the Trust Estate that
is not real property or other intended
disposition thereof.
(b) If an Event of Default shall have occurred and be
continuing, the Beneficiary, to the extent permitted by law, shall be entitled
as a matter of right to the appointment of a receiver of the Trust Estate,
without notice or demand, without the requirement for a bond, and without regard
to the adequacy of the security for the Obligations or the solvency of the
Borrower. The Borrower hereby irrevocably consents to such appointment and
waives notice of any application therefor. Any such receiver or receivers shall
have all the usual powers and duties of receivers in like or similar cases and
all the powers and duties of the Beneficiary in case of entry as provided in
section 3.01(a)(i) and shall continue as such and exercise all such powers until
the date of confirmation of sale of the Trust Estate, unless such receivership
is sooner terminated.
(c) If an Event of Default shall have occurred and be
continuing, the Borrower hereby also assents to the passage of a decree by a
court of competent jurisdiction for the sale of the Trust Estate pursuant to the
terms of this Deed of Trust and applicable West Virginia law.
(d) In any sale under any provision of this Deed of Trust or
pursuant to any judgment or decree of court, the Trust Estate, to the extent
permitted by law, may be sold in one or more parcels or as an entirety and in
such order as the Trustee or the Beneficiary may elect, without regard to the
right of the Borrower, or any person claiming under the Borrower to the
marshalling of assets. The purchaser at any such sale shall take title to the
Trust Estate or the part thereof so sold free and discharged of the estate of
the Borrower therein, the purchaser being hereby discharged from all liability
to see to the application of the purchase money. Any person, including the
Beneficiary and the Trustee, may purchase at any such sale. Upon the completion
of any such sale made by the Trustee or the Beneficiary or by virtue of this
Section 3.01, the Trustee shall execute and deliver to the purchaser an
appropriate instrument which shall
WA: 1043170v4
197770-600002
Printed: 12-23-98 12:53
14
<PAGE>
effectively transfer all of the Borrower's and the Trustee's estate, right,
title, interest, property, claim and demand in and to the Trust Estate or
portion thereof so sold, but without any covenant or warranty, express or
implied. The Trustee and the Beneficiary are hereby irrevocably appointed the
attorneys-in-fact of the Borrower in its name and stead to make all appropriate
transfers and deliveries of the Trust Estate or any portions thereof so sold
and, for that purpose, the Beneficiary or the Trustee, or both, may execute all
appropriate instruments of transfer, and may substitute one or more persons with
like power, the Borrower hereby ratifying and confirming all that said attorneys
or such substitute or substitutes shall lawfully do by virtue hereof. Any sale
or sales made under or by virtue of this Deed of Trust, to the extent not
prohibited by law, shall operate to divest all the estate, right, title,
interest, property, claim and demand whatsoever, whether at law or in equity, of
the Borrower in and to the Trust Estate, or any portions thereof so sold, and
shall be a perpetual bar both at law and in equity against the Borrower and
against any and all persons claiming or who may claim the same, or any part
thereof, by through or under the Borrower. The powers and agency herein granted
are coupled with an interest and are irrevocable.
(e) In the event that foreclosure proceedings are instituted
hereunder but are not completed, Trustee shall be reimbursed for all reasonable
costs and expenses so incurred by Trustee, together with interest thereon until
paid at the Default Rate.
Section 3.03. Application of Proceeds. The proceeds of any
enforcement of this Deed of Trust, including any sale made either under the
power of sale hereby given or under a judgment, order or decree made in any
action to foreclose or to enforce this Deed of Trust shall be applied as
determined by the Beneficiary in a manner consistent with Section 38-1-7 of the
Code of West Virginia, as from time to time amended.
Section 3.04. Right to Sue. If an Event of Default has
occurred and is continuing, the Trustee and the Beneficiary shall have the right
from time to time to sue for any sums required to be paid by the Borrower under
the terms of this Deed of Trust as the same become due, without regard to
whether or not the Obligations shall be, or have become, due and without
prejudice to the right of the Trustee or the Beneficiary thereafter to bring any
action or proceeding of foreclosure or any other action upon the occurrence of
any Event of Default existing at the time such earlier action was commenced.
Section 3.05. Powers of the Trustee and the Beneficiary.
(a) The Trustee or the Beneficiary may at any time or from
time to time renew or extend this Deed of Trust, alter or modify the
same in any way, or waive any of the terms, covenants or conditions
hereof or thereof, in whole or in part, and may release or reconvey any
portion of the Trust Estate or any other security, and grant such
extensions and indulgences in relation to the Obligations, or release
any person liable therefor as the Trustee or the Beneficiary may
determine without the consent of any junior lien or
WA: 1043170v4
197770-600002
Printed: 12-23-98 12:53
15
<PAGE>
encumbrancer, without any obligation to give notice of any kind
thereto, without in any manner affecting the priority of the lien and
estate of this Deed of Trust on or in any part of the Trust Estate, and
without affecting the liability of the Borrower or any other person
liable for any of the Obligations;
(b) No right or remedy herein conferred upon or reserved to
the Trustee or the Beneficiary is intended to be exclusive of any other
right or remedy, and each and every right and remedy shall be
cumulative and in addition to any right or remedy under this Deed of
Trust, and the failure of the Trustee or the Beneficiary to insist at
any time upon the strict observance or performance of any of the
provisions of this Deed of Trust, or to exercise any right or remedy
provided for herein, shall not impair any such right or remedy nor be
construed as a waiver or relinquishment thereof, and
(c) The Trustee and the Beneficiary, and each of them, shall
be entitled to enforce payment and performance of any of the
Obligations and to exercise all rights and powers under this Deed of
Trust or any laws now or hereafter in force, notwithstanding that some
or all of the Obligations may now or hereafter be otherwise secured,
whether by mortgage, deed of trust, pledge, lien, assignment or
otherwise; neither the acceptance of this Deed of Trust nor its
enforcement, whether by court action or pursuant to the power of sale
or other powers herein contained, shall prejudice or in any manner
affect the Trustee's or the Beneficiary's right to realize upon or
enforce any other security now or hereafter held by the Trustee or the
Beneficiary, it being stipulated that the Trustee and the Beneficiary,
and each of them, shall be entitled to enforce this Deed of Trust and
any other security now or hereafter held by the Trustee or the
Beneficiary in such order and manner as they, in their sole discretion,
may determine; every power or remedy given by this Deed of Trust to the
Trustee or Beneficiary or to which either of them may be otherwise
entitled, may be exercised, concurrently or independently, from time to
time and as often as may be deemed expedient by the Beneficiary, and
either of them may pursue inconsistent remedies.
(d) The Trustee may act through its agent or attorney and it
shall not be necessary for the Trustee to be present in person at any
foreclosure sale under this Deed of Trust.
Section 3.06. Waiver of Stay, Extension, Moratorium Laws;
Equity of Redemption. To the extent permitted by law, the Borrower shall not at
any time insist upon, or plead, or in any manner whatever claim or take any
benefit or advantage of any applicable present or future stay, extension or
moratorium law, which may affect observance or performance of any provision of
this Deed of Trust; nor claim, take or insist upon any benefit or advantage of
any present or future law providing for the valuation or appraisal of the Trust
Estate or any portion thereof prior to any sale or sales thereof which may be
made under or by virtue of Section 3.01; and the Borrower, to the extent that it
lawfully may, hereby waives all benefit or advantage of any such law or laws.
The Borrower for itself and all who may claim under it, hereby waives, to the
extent permitted by applicable law, any and all rights and equities of
redemption from sale
WA: 1043170v4
197770-600002
Printed: 12-23-98 12:53
16
<PAGE>
under the power of sale created hereunder or from sale under any order or decree
of foreclosure of this Deed of Trust and (if an Event of Default shall have
occurred and be continuing) all notice or notices of seizure, and all right to
have the Trust Estate marshalled upon any foreclosure hereof. Neither the
Trustee nor the Beneficiary shall be obligated to pursue or exhaust its rights
or remedies as against any other part of the Trust Estate nor shall the Borrower
have the right to have the Trustee or the Beneficiary proceed in any particular
order.
ARTICLE IV
The Trustee
Section 4.01. Acceptance by Trustee. The Trustee accepts this
trust when this Deed of Trust, duly executed and acknowledged, is made a public
record as provided by law.
Section 4.02. Compensation. The Trustee waives any statutory
fee and shall accept reasonable compensation from the Beneficiary in lieu
thereof for any services rendered by it in accordance with the terms hereof.
Section 4.03. Action in Accordance With Instructions. Upon
receipt by the Trustee of instructions from the Beneficiary at any time or from
time to time, the Trustee shall (a) give any notice or direction or exercise any
right, remedy or power hereunder or in respect of any part or all of the Trust
Estate as shall be specified in such instructions and (b) approve such direction
or exercise as satisfactory to the Trustee or to the Beneficiary. The Trustee
may, but need not, take any of such actions in the absence of such instructions.
At any time or from time to time, upon request of the Beneficiary and
presentation of this Deed of Trust for endorsement, and without affecting the
liability of any person for payment of the Obligations, the Trustee shall
reconvey all or any part of the Trust Estate, consent to the making of any map
or plat thereof, join in granting any easement thereon, or join in any extension
agreement or any agreement subordinating the lien and estate hereof. If there is
at any time more than one person or entity serving as Trustee hereunder, either
of them or any successor of either of them may act on behalf of the Trustee.
Section 4.04. Resignation. The Trustee may resign at any time
upon giving not less than 60 days' prior notice to the Beneficiary, but shall
continue to act as trustee until its successor shall have been chosen and
qualified.
Section 4.05. Successor Trustee. In the event of the death,
removal, resignation or refusal or inability of the Trustee to act, or for any
reason at any time, the Beneficiary shall have the irrevocable power, with or
without cause, without prior notice of any kind, and without applying to any
court, to select and appoint a successor trustee. Each such appointment and
substitution shall be made by notice to the Borrower, the Trustee and successor
trustee and by recording notice of such in each office in which this Deed of
Trust is recorded. Such notice shall
WA: 1043170v4
197770-600002
Printed: 12-23-98 12:53
17
<PAGE>
be executed and acknowledged by the Beneficiary and shall be conclusive proof of
proper appointment of the successor trustee. Such successor shall not be
required to give bond for the faithful performance of its duties unless required
by the Beneficiary.
ARTICLE V
Miscellaneous
Section 5.01. Release by Trustee. Upon payment by Borrower of
the Obligations and the Trustee's expenses, the Trustee shall release this Deed
of Trust by an instrument duly acknowledged, in form for recording.
Section 5.02. Notices. All notices, requests, demands,
consents, approvals or other communications to, upon or by any party hereto
shall be sent to the parties at the addresses set forth in the first paragraph
of this Deed of Trust or at such other address as may be specified in writing to
the parties. The address of the Beneficiary as specified is the address for the
party secured by this Deed of Trust.
Section 5.03. Amendments, Waivers, Etc. This Deed of Trust
cannot be modified, changed or discharged except by an agreement in writing,
duly acknowledged in form for recording, signed by the party against whom
enforcement of such modification, change or discharge is sought. No amendment
shall be deemed approved by or consented to by or effective against the
Beneficiary unless approved in writing by MSDW Synfuels II, Inc. and Fannie Mae.
Section 5.04. Successors and Assigns. This Deed of Trust shall
bind and inure to the benefit of the parties hereto and their respective
successors and assigns and shall run with the Property, except that the Borrower
may not assign its rights or delegate its obligation hereunder without the prior
consent of the Beneficiary.
Section 5.05. Severability. If any term or provision of this
Deed of Trust or the application thereof to any person or circumstance shall to
any extent be invalid or unenforceable, the remainder of this Deed of Trust, or
the application of such term or provision to persons or circumstances other than
those as to which it is invalid or unenforceable, shall not be affected thereby,
and each term and provision of this Deed of Trust shall be valid and enforceable
to the fullest extent permitted by law. Should this Deed of Trust be or become
ineffective as a deed of trust, then it shall be construed and enforced as a
realty mortgage with the Borrower being the mortgagor and the Beneficiary being
the mortgagee.
Section 5.06. No Merger. If both the lessor's and lessee's
estates under any lease or any portion thereof which constitutes a part of the
Trust Estate shall at any time become vested in one owner, this Deed of Trust
and the lien and estate created hereby shall not be destroyed or terminated by
application of the doctrine of merger and, in such event, the Beneficiary shall
WA: 1043170v4
197770-600002
Printed: 12-23-98 12:53
18
<PAGE>
continue to have and enjoy all of the rights and privileges of the Beneficiary
as to the separate estates. In addition, upon foreclosure of this Deed of Trust,
any such lease shall not be destroyed or terminated by application of the law of
merger or as a matter of law or as a result of such foreclosure unless the
Beneficiary or any purchaser at such foreclosure sale shall so elect.
Section 5.07. Limitation of Interest. It is the intention of
the Borrower and the Beneficiary in the execution of the Note to contract in
strict compliance with all applicable usury laws. In furtherance thereof, the
Beneficiary and the Borrower stipulate that none of the terms and provisions
contained in the Note shall ever be construed to create a contract for the use,
forbearance or detention of money requiring payment of interest at a rate in
excess of the maximum interest rate permitted to be charged by applicable law.
The Borrower shall never be liable for unearned interest on the Obligations and
shall never be required to pay interest thereon at a rate in excess of the
maximum interest which may be lawfully charged under applicable usury laws and
this Section 5.07 shall control over all other provisions of the Note executed
in connection herewith or therewith which may be in apparent conflict herewith.
If the Beneficiary shall collect monies which are deemed to constitute interest
which would otherwise increase the effective interest rate on the Obligations to
a rate in excess of that permitted to be charged by applicable usury laws, all
such sums deemed to constitute interest in excess of the legal rate shall be
immediately returned to the Borrower upon such determination.
Section 5.08. Trust is Irrevocable. The trust created hereby
is irrevocable by the Borrower subject to defeasance in accordance with this
Deed of Trust.
Section 5.09. Governing Law. This Deed of Trust shall be
governed by and interpreted in accordance with the law of the State of West
Virginia.
Section 5. 10. Beneficial Owner. The beneficial owner and
holder of the Obligations at the time of execution and delivery hereof is the
Beneficiary, whose resident address is stated in the first paragraph of this
Deed of Trust.
Section 5.11. Status of Parties. It is understood and agreed
that the relationship of the Borrower and the Beneficiary is that of borrower
and lender and that nothing herein or in the Note or any document evidencing or
securing the same shall be construed to constitute a partnership, joint venture
or co-tenancy among the Borrower or the Beneficiary.
[Signatures begin on next page.]
WA: 1043170v4
197770-600002
Printed: 12-23-98 12:53
19
<PAGE>
IN WITNESS WHEREOF, this Deed of Trust has been duly executed,
acknowledged and delivered by the Borrower as of the day and year first above
written.
COVOL TECHNOLOGIES, INC.
[SEAL] By: /Stanley M. Kimball/
------------------------
Name: Stanley M. Kimball
Title: President
State of _______Utah________) City/County of _Utah________________), to wit:
On this _8th_ day of December, 1998, before me, __Asael T. Sorensen,
Jr._, a notary public in and for the above-said jurisdiction, personally
appeared ___________________, personally known to me (or proved to me on the
basis of satisfactory evidence) to be the person whose name is subscribed to the
within instrument as __President_________ of Covol Technologies, Inc., the
company which executed and delivered the within instrument and acknowledged to
me that, being informed of the contents thereof, he executed and delivered the
same, voluntarily in his capacity as such, for the purposes therein stated, on
behalf of said company as the free act and deed of said company.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year in this certificate first above written.
[SEAL] /Asael T. Sorensen, Jr./
Notary Public
This Deed of Trust was
prepared by: Michael S. Kosmas, Esq.
Jones, Day, Reavis & Pogue
1450 G Street, N.W., Suite 600
Washington, D.C. 20005
WA: 1043170v4
197770-600002
Printed: 12-23-98 12:53
20
AMENDMENT NO. 1 TO DEED OF GROUND LEASE
THIS AMENDMENT NO. 1 TO DEED OF GROUND LEASE (this "Amendment"), dated
as of the 8th day of December, 1998, by and between UPSHUR PROPERTY, INC., a
Delaware corporation (the "Landlord") and COVOL TECHNOLOGIES, INC., a Delaware
corporation (the "Tenant").
WHEREAS, the Landlord and the Tenant are parties to that certain Deed
of Ground Lease dated as of May 5, 1998 (the "Lease"); and
WHEREAS, the Landlord and the Tenant desire to amend the terms of the
Lease as set forth herein.
NOW, THEREFORE, in consideration for Ten Dollars ($10.00) cash in hand
paid by Tenant to Landlord, the receipt and sufficiency of which is hereby
acknowledged, the Landlord and the Tenant agree to amend the terms of the Lease
as follows:
1. Section 6.1 of the Lease is hereby deleted in its entirety and
replaced with the following: "Section 6.1 Right to Mortgage. Except for that
certain Leasehold Credit Line Deed of Trust and Security Agreement, dated as of
December 8, 1998, from Covol Technologies, Inc. to ______________________, as
Trustee, for the Benefit of Mountaineer Synfuel, L.L.C. (the "Mountaineer
Leasehold Deed of Trust"), the Tenant shall not grant, or cause to be created,
any deed of trust or other lien, encumbrance or security interest on or in all
or any part of this Lease or Tenant's interest in the Premises. Tenant hereby
covenants and agrees that it will not agree to amend, change or alter the
Mountaineer Leasehold Deed of Trust without first obtaining the express written
consent of the Landlord, which consent may be withheld for any reason."
<PAGE>
2. Section 9.1(f) of the Lease is hereby deleted in its entirety and
replaced with the following: "(f) Mountaineer fails to exercise its option to
purchase the Facility and to require Tenant to assign this Lease to Mountaineer
prior to March 31, 1999."
3. Except as expressly set forth herein, all of the terms and
conditions of the Lease shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed by their duly authorized representatives as of the day and year first
above written.
UPSHUR PROPERTY, INC.,
a Delaware corporation
By: /Michael M. Matesic/
-------------------------
Name: Michael M. Matesic
Its: Treas.
COVOL TECHNOLOGIES, INC.,
a Delaware corporation
By: /Stanley M. Kimball/
-------------------------
Name: Stanley M. Kimball
Its: President
2
COVOL TECHNOLOGIES, INC.
DEBENTURE AGREEMENT AND SECURITY AGREEMENT
January 9, 1998
<PAGE>
TABLE OF CONTENTS
Section Page
1. Loans; Terms and Conditions; Issuance of Debenture and Warrants..........1
1.1 Loans...........................................................1
1.2 Terms and Conditions............................................1
1.3 Issuance of Debenture and Warrants..............................1
2. Representations, Warranties and Covenants of the Company.................1
2.1 Corporate Existence; Compliance with Law........................1
2.2 Corporate Power; Authorization; Enforceable Obligations.........2
2.3 Authorization and Valid Issuance of Debenture and Warrants......2
2.4 Securities Laws.................................................3
2.5 Disclosure......................................................3
2.6 Authorized and Outstanding Shares of Capital Stock..............3
2.7 Ownership of Property; Liens....................................3
2.8 Patents, Trademarks, Copyrights and Licenses....................3
2.9 No Material Adverse Effect......................................3
2.10 Environmental Laws..............................................4
2.11 Use of Proceeds.................................................4
3. Representations, Warranties and Covenants of the Investor................4
3.1 Purchase Entirely for Own Account...............................4
3.2 Disclosure of Information.......................................4
3.3 Investment Experience...........................................4
3.4 Restricted Securities...........................................4
3.5 Legends.........................................................5
3.6 Accredited Investor.............................................5
4. Valuation of Warrants....................................................5
4.1 Value of Warrants...............................................5
4.2 Financial and Tax Reporting.....................................5
4.3 Issue Price.....................................................5
4.4 Interpretation..................................................5
5. Security Agreement.......................................................6
5.1 Security Interest...............................................6
5.2 Collateral......................................................6
5.3 Perfection and Priority.........................................6
5.4 Affirmative Covenants...........................................6
5.5 Negative Covenants..............................................7
5.6 Insurance; Payment of Premiums..................................7
i
<PAGE>
5.7 Remedies Upon Default...........................................8
6. Conditions Precedent.....................................................9
6.1 Execution and Delivery of Agreement.............................9
6.2 Documents and Other Agreements..................................9
6.3 Absence of Material Adverse Change.............................10
6.4 Conditions to the Closing.....................................10
7. Miscellaneous...........................................................10
7.1 Survival of Warranties.........................................10
7.2 Successors and Assigns.........................................10
7.3 Governing Law..................................................11
7.4 Counterparts...................................................11
7.5 Titles and Subtitles...........................................11
7.6 Notices........................................................11
7.7 Expenses.......................................................11
7.8 Amendments and Waivers.........................................11
7.9 Severability...................................................11
7.10 Indemnity......................................................11
7.11 Waiver of Trial by Jury........................................12
7.12 Entire Agreement...............................................12
ii
<PAGE>
DEBENTURE AGREEMENT AND SECURITY AGREEMENT
THIS DEBENTURE AGREEMENT AND SECURITY AGREEMENT is made as of the 9th
day of January, 1998, by and among COVOL TECHNOLOGIES, INC., a Delaware
corporation (the "Company"), and AJG FINANCIAL SERVICES, INC., a Delaware
corporation ("Investor").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Loans; Terms and Conditions; Issuance of Debenture and Warrants.
1.1 Loans. During the period July 17, 1997, to and including
January 9, 1998, Investor provided debt financing in the form of loans
("Loans") to the Company for use by the Company in the construction of
the Wash Plant at the Company's facility at Wellington, Utah. The
aggregate principal amount of the Loans, together with accrued interest
thereon, is $4,367,351.28.
1.2 Terms and Conditions. This Agreement confirms the terms
and conditions upon which Investor made the Loans to the Company.
1.3 Issuance of Debenture and Warrants. To evidence the
aggregate outstanding principal amount of the Loans made by Investor to
the Company, together with interest thereon to the date hereof, the
Company shall issue to Investor, concurrently with the execution and
delivery of this Agreement (the "Closing"), the Company's Debenture in
the form set forth in Exhibit A hereto, and the Company's Warrants (one
designated Warrant A and the other designated Warrant B) evidencing
rights to purchase initially up to an aggregate of 432,544 shares of
Common Stock of the Company. The Debenture shall replace the Company's
Promissory Note, dated January 9, 1998, payable to the order of
Investor in the principal amount of $4,325,432.79, and such Promissory
Note shall be marked "replaced by Debenture dated January 9, 1998", and
delivered to the Company.
2. Representations, Warranties and Covenants of the Company. The
Company hereby represents, warrants and covenants to Investor that:
2.1 Corporate Existence; Compliance with Law. The Company (i)
is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware; (ii) is duly qualified as a
foreign corporation and in good standing under the laws of each
jurisdiction where its ownership or lease of property or the conduct of
its business requires such qualification; (iii) has the requisite
corporate power and authority and the legal right to own, pledge,
mortgage or otherwise encumber and operate its properties, to lease the
property it operates under lease, and to conduct its business as now,
heretofore and proposed to be conducted; (iv) has all material
licenses, permits, consents or approvals
1
<PAGE>
from or by, and has or will have made all material filings with, and
has or will have given all material notices to, all governmental
authorities having jurisdiction, to the extent required for such
ownership, operation and conduct; (v) is in compliance with its
certificate of incorporation and by-laws; and (vi) is in compliance
with all applicable provisions of law, including, without limitation,
the Employee Retirement Income Security Act of 1974, as amended, those
regarding the collection, payment and deposit of employees' income,
unemployment and Social Security taxes, and those relating to
environmental matters where the failure to comply could reasonably be
expected to have a material adverse effect on the business of the
Company.
2.2 Corporate Power; Authorization; Enforceable Obligations.
The execution, delivery and performance by the Company of this
Agreement and the Debenture (i) are within the Company's corporate
power; (ii) have been duly authorized by all necessary or proper
corporate action; (iii) are not in contravention of any provision of
the Company's certificate of incorporation or by-laws; (iv) will not
violate any law or regulation, or any order or decree of any court or
governmental instrumentality; (v) will not conflict with or result in
the breach or termination of, constitute a default under, or accelerate
any performance required by, any indenture, mortgage, deed of trust,
lease, agreement or other instrument to which the Company is a party or
by which the Company or any of its property is bound (except such
conflict, breach, termination, default or acceleration as could not
reasonably be expected to have a material adverse effect on the
business of the Company); (vi) will not result in the creation or
imposition of any lien upon any of the property of the Company other
than those in favor of the Investor; and (vii) do not require the
consent or approval of any governmental body, agency, authority or any
other Person. At or prior to the Closing, each of the documents to be
delivered at such time shall have been duly executed and delivered for
the benefit of or on behalf of the Company, and each shall then
constitute a legal, valid and binding obligation of the Company to the
extent it is a party thereto, enforceable against it in accordance with
its terms, subject to the effects of laws governing creditors rights
generally and general principles of equity.
2.3 Authorization and Valid Issuance of Debenture and
Warrants. All corporate action on the part of the Company and its
officers, directors and stockholders necessary for the authorization,
issuance and delivery of the Debenture being issued hereunder and the
reservation for issuance of shares of Common Stock issuable upon
exercise of the Warrants have been taken or will be taken prior to the
Closing, and this Agreement, the Debenture and the Warrants shall then
constitute valid and legally binding obligations of the Company, each
enforceable in accordance with its terms. The Debentures which are
being acquired by the Investor, when issued and delivered in accordance
with the terms hereof for the consideration expressed herein, will be
duly and validly issued. The Common Stock issuable upon exercise of the
Warrants has been duly and validly reserved for issuance and, upon
issuance in accordance with the terms of the Warrants and the Company's
Certificate of Incorporation, shall be duly and validly issued, fully
paid and
2
<PAGE>
nonassessable, and issued in compliance with all applicable federal and
state securities laws, as currently in effect.
2.4 Securities Laws. In reliance on the investment
representations contained in Section 3.1 hereof, the offer, issuance,
sale and delivery of the Warrants, as provided in this Agreement, is
exempt from the registration requirements of the Securities Act of
1933, as amended, and the rules and regulations thereunder, and all
applicable state securities laws.
2.5 Disclosure. The Company's Form 10-K for the fiscal year
ended September 30, 1997, and all other written information furnished
to Investor did not, as of the date of such information, contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein not misleading.
2.6 Authorized and Outstanding Shares of Capital Stock. After
giving effect to the Closing, the authorized capital stock of the
Company consists of 50,000,000 shares of Common Stock, $0.001 par
value, of which11,326,404 Shares are issued and outstanding. Except for
(i) the Warrants and (ii) rights to acquire 5,104,518 Shares (a) no
subscription, warrant, option or other right to purchase or acquire any
shares of any class of capital stock is authorized or outstanding, and
(b) there is no commitment of the Company to issue any such shares,
warrants, options or other such rights or securities.
2.7 Ownership of Property; Liens. The Company owns good and
merchantable title to, or valid leasehold interests in, all of its
properties and assets; and the Company has received all deeds,
assignments, waivers, consents, non-disturbance and recognition or
similar agreements, bills of sale and other documents, and duly
effected all recordings, filings and other actions necessary to
establish, protect and perfect the Company's right, title and interest
in and to all such property to the extent necessary to use such
property in its ordinary business operations.
2.8 Patents, Trademarks, Copyrights and Licenses. The Company
owns all material licenses, patents, patent applications, copyrights,
service marks, trademarks, trade mark applications, and trade names
necessary to continue to conduct its business as heretofore conducted
by it, now conducted by it and proposed to be conducted by it, each of
which is listed, together with Patent and Trademark Office application
or registration numbers, where applicable, on Schedule 2.8 hereto. The
Company conducts its businesses without infringement or claim of
infringement of any license, patent, copyright, service mark,
trademark, trade name, trade secret or other intellectual property
right of others. To the best knowledge of the Company, there is no
infringement or claim of infringement by others of any material,
license, patent, copyright, service mark, trademark, trade name, trade
secret or other intellectual property right of the Company.
3
<PAGE>
2.9 No Material Adverse Effect. Except as disclosed on
Schedule 2.9 hereto, no event has occurred since September 30, 1997,
and is continuing which has had or could reasonably be expected to have
a material adverse effect on the business, assets, properties,
operations, prospects or financial or other condition of the Company.
2.10 Environmental Laws. All premises and facilities owned,
leased, used or operated by the Company or, to the knowledge of any
executive officer of the Company after a reasonable investigation, any
predecessor in interest, have been, and continue to be, owned, leased,
used or operated in compliance in all material respects with all
applicable environmental laws.
2.11 Use of Proceeds. The proceeds of the loans by Investor to
the Company were used for the construction of the Wash Plant at the
Company's facility at Wellington, Utah.
3. Representations, Warranties and Covenants of the Investor. Investor
hereby represents and warrants that:
3.1 Purchase Entirely for Own Account. Investor hereby
confirms that the Debenture and the Warrants to be received by Investor
hereunder and the Common Stock issuable upon exercise of the Warrants
(collectively, the "Securities") will be acquired for Investor's own
account and not with a view to the resale or distribution of any part
thereof, and that Investor has no agreement or arrangement with regard
to or present intention of selling, granting any participation in, or
otherwise distributing the same; provided, however, notwithstanding the
foregoing, Investor may effect transactions in reliance on Rule 144A
promulgated under the Securities Act of 1933, as amended (the "Act").
3.2 Disclosure of Information. Investor has received all the
information it considers necessary or appropriate for deciding whether
to purchase the Securities being issued hereunder. Investor further
represents that it has had an opportunity to ask questions and receive
answers from the Company regarding the terms and conditions of the sale
of the Securities.
3.3 Investment Experience. Investor acknowledges that it is
able to fend for itself, can bear the economic risk of its investment
and has such knowledge and experience in financial or business matters
that it is capable of evaluating the merits and risks of the investment
in the Securities being issued hereunder.
3.4 Restricted Securities. Investor understands that the
Debenture and the shares of Common Stock issuable upon exercise of the
Warrants it is acquiring pursuant hereto are characterized as
"restricted securities" under the federal securities laws inasmuch as
each is being acquired from the Company in a transaction not involving
a public offering and that under such laws and applicable regulations
such securities may be resold without registration under the Act only
in certain limited circumstances. In this connection, Investor
represents
4
<PAGE>
that it is familiar with Rule 144 under the Act, as presently in
effect, and understands the resale limitations imposed thereby and by
the Act.
3.5 Legends. It is understood that the Debenture and the
Warrants being issued hereunder and the Common Stock issuable upon
exercise of the Warrants will bear a legend substantially similar to
the following:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR REGISTERED OR
OTHERWISE QUALIFIED FOR SALE UNDER ANY APPLICABLE STATE
SECURITIES LAWS AND MAY NOT BE TRANSFERRED OR SOLD OR OFFERED
FOR SALE OR OTHERWISE TRANSFERRED, PLEDGED, HYPOTHECATED OR
DISPOSED OF UNLESS IT HAS BEEN REGISTERED UNDER THE ACT AND
REGISTERED OR OTHERWISE QUALIFIED FOR SALE UNDER SUCH STATE
SECURITIES LAWS OR AN EXCEPTION FROM REGISTRATION THEREUNDER
IS AVAILABLE."
3.6 Accredited Investor. Investor is an Accredited Investor
within the definition set forth in Rule 501(a) under the Act.
4. Valuation of Warrants.
4.1 Value of Warrants. The fair market value of Warrant A as
of the date hereof is $1,000.00 and the fair market value of Warrant B
as of the date hereof is $100.00, and accordingly, of the $4,367,351.28
stated principal amount of the Debenture, $1,100.00 is to be provided
by Investor to the Company for the Warrants. Said fair market value was
determined by the parties based on comparisons with comparable warrants
of other issuers and Investor's customary investment considerations for
equity and debt financing of such kind.
4.2 Financial and Tax Reporting. The Company and Investor
shall prepare their respective financial accounting statements, and
shall prepare and file their respective Federal (as well as state and
local) income tax returns, in a manner consistent with the foregoing
allocation of the stated principal amount of the Debenture between the
Debenture and the Warrants, including but not limited to Investor's tax
basis in the Warrants and Debenture in accordance with Section
1.1012(d) of the Treasury Regulations.
4.3 Issue Price. The "issue price" (within the meaning of
Section 1272(b) of the Internal Revenue Code of 1986 (the "Code")) of
the Debenture shall be equal to $4,366,251.28.
5
<PAGE>
4.4 Interpretation. No provision in this Agreement shall be
interpreted, alone or in conjunction with any other agreement between
or among Investor and the Company, or either of them (i) to alter the
amount of the exercise price of the Warrants or to alter any rights
granted to Investor in conjunction with the Warrants, or (ii) to limit
or impair in any way the rights of Investor under the Warrants, this
Agreement, the Debenture or any other agreement.
5. Security Agreement. Payment of the Debenture shall be secured to the
extent described below:
5.1 Security Interest. The Company hereby grants to Investor a
security interest in the property and its proceeds described in Section
5.2 herein to secure the Company's obligations under the Debenture (the
"Security Interest").
5.2 Collateral. The property in which the Security Interest is
granted (the "Collateral") consists of a continuing interest in the
following: the Wash Plant at the Company's facility at Farnum Road,
Wellington, Utah, and all machinery and equipment which is a part
thereof, including the machinery and equipment described on Schedule
5.2 hereto and all processing equipment, conveyors, data processing and
computer equipment with software and peripheral equipment, tools,
attachments, accessories, and other equipment of every kind and nature,
whether now owned or hereafter acquired, together with all additions
and accessions thereto, replacements therefor, all parts therefor, all
substitutions for any of the foregoing, fuel therefor, and all manuals,
drawings, instructions, warranties and rights with respect thereto, and
all products and proceeds thereof and condemnation awards and insurance
proceeds with respect thereto.
5.3 Perfection and Priority. The Security Interest grant
herein shall be a first priority lien on the Collateral, subject to no
other liens, claims or rights of others.
5.4 Affirmative Covenants. The Company covenants that it
shall:
(a) Keep and maintain all Collateral consisting of
equipment and machinery in good operating condition and
repair; make all necessary replacements thereof so that the
value and operating efficiency thereof shall at all times be
maintained and preserved; promptly inform Investor of any
additions to or deletions from such equipment and machinery;
and prevent any such equipment and machinery from becoming a
fixture to real estate or accession to other personal
property;
(b) Promptly discharge any liens, encumbrances or
other claims against the Collateral;
(c) Maintain such insurance as may be required by law
and such other insurance to such extent and against such
hazards and liabilities as is customarily
6
<PAGE>
maintained by companies similarly situated, and include
Investor as an additional insured on all liability policies;
and
(d) Comply strictly and in all respects with all
applicable environmental laws.
5.5 Negative Covenants. The Company covenants that it shall
not, without Investor's prior written consent, which Investor may or
may not in its sole discretion give:
(a) Enter into any transaction which materially and
adversely affects the Collateral or the Company's ability to
repay the indebtedness under the Debenture;
(b) Remove the Collateral from the Company's facility
at Wellington, Utah, or keep the Collateral at any other
location unless (i) the Company gives Investor written notice
thereof and of the new location of the Collateral at least
thirty (30) days prior thereto, and (ii) the other location is
within the continental United States of America; or
(c) Create or permit any lien on any of the
Collateral, other than liens created hereunder.
5.6 Insurance; Payment of Premiums. The Company shall, at its
sole cost and expense, keep and maintain the Collateral insured for its
full insurable value against loss or damage by fire, theft, explosion,
sprinklers and all other hazards and risks ordinarily insured against
by other owners or users of such properties in similar businesses and
notify Investor promptly of any occurrence causing a material loss or
decline in value of the Collateral and the estimated (or actual, if
available) amount of such loss or decline. All policies of insurance on
the Collateral shall be in form and with insurers recognized as
adequate by prudent business persons and all such policies shall be in
such amounts as may be satisfactory to Investor. The Company shall
deliver to Investor a certificate of insurance and, upon request, the
original (or certified copy) of each policy of insurance, and evidence
of payment of all premiums therefor. Such policies of insurance shall
contain an endorsement, in form and substance acceptable to Investor,
showing loss payable to Investor, as its interests may appear. Such
endorsement, or an independent instrument furnished to Investor, shall
provide that the insurance companies will give Investor at least thirty
(30) days prior written notice before any such policy or policies of
insurance shall be altered or canceled and that no act or default of
the Company or any other person shall affect the right of Investor to
recover under such policy or policies of insurance in case of loss or
damage. The Company hereby directs all insurers under such policies of
insurance to pay all proceeds payable thereunder directly to Investor,
as its interests may appear. The Company irrevocably makes, constitutes
and appoints Investor (and all officers, employees or agents designated
by Investor) as the Company's true and lawful attorney (and
agent-in-fact) for the purpose of making, settling and adjusting claims
under such policies of insurance, endorsing the name
7
<PAGE>
of the Company on any check, draft, instrument or other items of
payment for the proceeds of such policies of insurance and for making
all determinations and decisions with respect to such policies of
insurance. In the event the Company, at any time hereafter, shall fail
to obtain or maintain any of the policies of insurance required above
or to pay any premium in whole or in part relating thereto, then
Investor, without waiving or releasing any obligations or default by
the Company hereunder, may at any time thereafter (but shall be under
no obligation to) obtain and maintain such policies of insurance and
pay such premium and take any other action with respect thereto which
Investor deems advisable. All sums so disbursed by Investor, including
reasonable attorneys' fees, court costs, expenses and other charges
relating thereto, shall be payable on demand by the Company to Investor
and shall be additional liabilities under the Debenture secured by the
Collateral.
5.7 Remedies Upon Default. In the event of any Event of
Default under the Debenture, Investor may do any one or more of the
following:
(a) Declare any indebtedness under the Debenture
immediately due and payable;
(b) Enforce the security interest given in this
Agreement under the provisions of the Uniform Commercial Code
of the applicable state or any other equivalent law;
(c) Enter upon the premises of the Company, without
any obligation to pay rent to the Company, through self-help
and without judicial process, without first obtaining a final
judgment or giving the Company notice and opportunity for a
hearing on the validity of Investor's claim, or any other
place or places where the Collateral is located and kept, and
remove the Collateral therefrom to the premises of Investor or
any agent of Investor, for such time as Investor may desire,
in order to effectively collect or liquidate the Collateral,
or (ii) require the Company to assemble the Collateral and
make it available to Investor at a place to be designated by
Investor, in its sole discretion;
(d) Take possession of the Collateral or any part of
it and of the records pertaining to the Collateral;
(e) Sell or otherwise dispose of all or any
Collateral at public or private sale or sales, with such
notice as may be required by law, in lots or in bulk, for cash
or on credit, all as Investor, in its sole discretion, may
deem advisable; (ii) adjourn such sales from time to time with
or without notice; (iii) conduct such sales on the Company's
premises or elsewhere and use the Company's premises without
charge for such sales for such time or times as Investor may
see fit. Investor shall have the right to sell, lease or
otherwise dispose of the Collateral, or any part thereof, for
cash, credit or any combination thereof, and Investor may
purchase all or any part of the
8
<PAGE>
Collateral at public or, if permitted by law, private sale
and, in lieu of actual payment of such purchase price, may
setoff the amount of such price against the indebtedness under
the Debenture. The proceeds realized from the sale of any
Collateral shall be applied first to the reasonable costs,
expenses and attorneys' fees and expenses incurred by Investor
for collection and for acquisition, completion, protection,
removal, storage, sale and delivery of the Collateral; second
to interest due upon any of the indebtedness under the
Debenture; and third to the principal of the indebtedness
under the Debenture. If any deficiency shall arise, the
Company shall remain liable to Investor therefor; and
(f) Exercise any other rights and remedies of a
secured party under the Uniform Commercial Code of the
applicable state or other applicable law, all of which rights
and remedies shall be cumulative and non-exclusive, to the
extent permitted by law.
6. Conditions Precedent
This Agreement shall become effective upon the satisfaction of the
following conditions precedent:
6.1 Execution and Delivery of Agreement. This Agreement or
counterparts thereof shall have been duly executed by, and delivered
to, the Company and the Investor.
6.2 Documents and Other Agreements. The Investor shall have
received all of the following, each in form and substance satisfactory
to the Investor:
(a) The Debenture;
(b) The Warrants (the "Warrants");
(c) Registration Rights Agreement between the Company
and the Investor (the "Registration Rights Agreement");
(d) A Certificate of the Secretary of the Company,
together with true and correct copies of the Certificate of
Incorporation and By-Laws of the Company, and all amendments
thereto, true and correct copies of the resolutions of the
Board of Directors of the Company authorizing or ratifying the
execution, delivery and performance of this Agreement, the
Debenture, the Warrants and the Registration Rights Agreement,
and the names of the officer or officers of the Company
authorized to sign this Agreement, the Debenture, the Warrants
and the Registration Rights Agreement, together with a sample
of the true signature of each such officer;
9
<PAGE>
(e) Certified copies of all documents evidencing any
other necessary corporate action, consents and governmental
approvals (if any) with respect to this Agreement, the
Debenture, the Warrants and the Registration Rights Agreement;
(f) The favorable opinion of Callister Nebeker &
McCullough, special counsel for the Company, addressed to the
Investor with respect to such matters as may be reasonably
requested by the Investor;
(g) The favorable opinion of Harlan M. Hatfield,
general counsel for the Company, addressed to the Investor
with respect to such matters as may be reasonably requested by
the Investor;
(h) The Certificate of Incorporation of the Company
certified by the Secretary of State of Delaware;
(i) Good Standing Certificates for the Company from
the Secretaries of State of Delaware, Alabama, Pennsylvania,
Utah, Virginia and West Virginia;
(j) UCC lien search reports of filings against the
Company for such jurisdictions as the Investor deems
appropriate;
(k) UCC Financing Statements filed against the
Company in respect to such jurisdictions as the Investor deems
appropriate; and
(l) Landlord's Waiver and Consent by Earthco;
(m) Certificate of insurance, together with a
properly executed Lender's Loss Payable Clause.
6.3 Absence of Material Adverse Change. No material adverse
change in the business, operations or condition, financial or
otherwise, of the Company shall have occurred or be continuing.
6.4 Conditions to the Closing. It shall be a condition to the
Closing that the conditions contained in Sections 5.1, 5.2 and 5.3
shall have been fulfilled.
7. Miscellaneous.
7.1 Survival of Warranties. The warranties, representations
and covenants of the Company and the Investor contained in or made
pursuant to this Agreement shall survive the execution and delivery of
this Agreement and the Closing and shall in no way be affected by any
investigation of the subject matter thereof made by or on behalf of
Investor or the Company.
10
<PAGE>
7.2 Successors and Assigns. Except as otherwise provided
herein, the terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the respective successors and assigns of
the parties (including transferees of the Debenture issued hereunder or
any Common Stock issued upon exercise of the Warrants).
7.3 Governing Law. This Agreement shall be governed by and
construed under the laws of the State of Utah without regard to choice
of law principles.
7.4 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
7.5 Titles and Subtitles. The titles and subtitles used in
this Agreement are used for convenience only and are not to be
considered in construing or interpreting this Agreement.
7.6 Notices. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be
deemed effectively given upon personal delivery to the party to be
notified or upon deposit with a reputable overnight courier or with the
United States Post Office, by registered or certified mail, postage
prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other
address as such party may designate by ten (10) days advance written
notice to the other parties.
7.7 Expenses. Each party shall bear its own expenses in
connection with the transactions contemplated by this Agreement.
7.8 Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived
only with the written consent of the Company and the Investor. Any
amendment or waiver effected in accordance with this Section shall be
binding upon each holder of any securities purchased under this
Agreement at the time outstanding, each future holder of all such
securities, and the Company.
7.9 Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall
be excluded from this Agreement and the balance of the Agreement shall
be interpreted as if such provision were so exuded and shall be
enforceable in accordance with its terms.
7.10 Indemnity. The Company hereby indemnifies the Investor,
and its directors, officers, employees, affiliates and agents
(collectively, "Indemnified Persons") against, and agrees to hold each
such Indemnified Person harmless from, any and all losses, claims,
damages and liabilities, including claims brought by any stockholder or
former stockholder
11
<PAGE>
of the Company, and related expenses, including reasonable counsel fees
and expenses, incurred by such Indemnified Person arising out of any
claim, litigation, investigation or proceeding (whether or not such
Indemnified Person is a party thereto) relating to any transactions,
services or matters that are the subject of this Agreement; provided,
however, that such indemnity shall not apply to any such losses,
claims, damages, or liabilities or related expenses determined by a
court of competent jurisdiction to have arisen from the gross
negligence or willful misconduct of such Indemnified Person.
7.11 Waiver of Trial by Jury. THE COMPANY AND THE INVESTOR
HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING OR
COUNTERCLAIM OF ANY KIND DIRECTLY OR INDIRECTLY ARISING OUT OF OR
RELATED TO THIS AGREEMENT OR THE DEBENTURE OR ANY ACT OR OMISSION WHICH
EITHER PARTY ASSERTS RESULTED IN ANY LIABILITY TO THE COMPANY, THE
INVESTOR OR THEIR RESPECTIVE OFFICERS, DIRECTORS, STOCKHOLDERS,
PARTNERS, EMPLOYEES OR AGENTS, TO THE FULL EXTENT PERMITTED BY LAW.
7.12 Entire Agreement. This Agreement, the Debenture, and
other documents delivered pursuant hereto constitute the full and
entire understanding and agreement between the parties with regard to
the subjects hereof and thereof.
7.13 Permissible Offset. To the extent the Company fails to
make payment of principal or interest when due under the Debenture,
Holder may setoff the amount of such deficiency against "Royalty
Amounts" (net of any commission that the Company would be required to
pay (e.g., Coalco)) due and owing to the Company from the Holder. For
purposes of this Section 7.13, "Royalty Amounts" shall mean royalties
and license fees due to the Company either from the Holder or from any
of the Holder's assigns or transferees that may owe a royalty or
license fee to the Company.
THE SECURITIES ARE SUITABLE ONLY FOR SOPHISTICATED INVESTORS FOR WHOM AN
INVESTMENT IN THE SECURITIES DOES NOT CONSTITUTE A COMPLETE INVESTMENT PROGRAM
AND WHO FULLY UNDERSTAND AND ARE WILLING TO ASSUME THE RISK INVOLVED IN PURCHASE
OF THE SECURITIES. NO OFFER TO SELL (OR SOLICITATION OF AN OFFER TO BUY) IS
BEING MADE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL. THERE WILL BE NO PUBLIC OFFERING OF THE SECURITIES.
IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF
THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS
INVOLVED. THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY ANY FEDERAL OR
STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY NOR HAS ANY SUCH FEDERAL OR
STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY PASSED UPON THE
12
<PAGE>
ACCURACY OR ADEQUACY OF ANY INFORMATION PROVIDED HEREWITH. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
Address: 3280 North Frontage Road COVOL TECHNOLOGIES, INC.
Lehi, Utah 84043
By: /Stanley M. Kimball/
-------------------------
Name: Stanley M. Kimball
Title: President
Address: The Gallagher Centre AJG FINANCIAL SERVICES, INC.
Two Pierce Place
Itasca, Illinois 60143-3141
By: /David R. Long/
-------------------------
Name: David R. Long
Title: President
13
THIS DEBENTURE HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
REGISTERED OR OTHERWISE QUALIFIED FOR SALE UNDER THE SECURITIES LAWS OF
ANY STATE. THIS DEBENTURE MAY NOT BE TRANSFERRED OR SOLD OR OFFERED FOR
SALE OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE
OF SUCH REGISTRATION OR QUALIFICATION OR AN EXEMPTION THEREFROM UNDER
SUCH ACT AND SUCH LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE
ISSUER HAS BEEN DELIVERED TO THE ISSUER TO THE EFFECT THAT SUCH
REGISTRATION IS NOT REQUIRED.
DEBENTURE DUE JANUARY 10, 2000
Salt Lake City, Utah
$4,367,351.28 January 9, 1998
COVOL TECHNOLOGIES, INC., a Delaware corporation whose headquarters are
located at 3280 North Frontage Road, Lehi, Utah 84043 (the "Company"), promises
to pay to the order of AJG FINANCIAL SERVICES, INC., or its successors and
assigns (the "Holder"), the aggregate principal sum of Four Million, Three
Hundred Sixty-Seven Thousand, Three Hundred Fifty-One and 28/100 Dollars
($4,367,351.28) (the "Principal Amount"), in lawful money of the United States
of America, together with interest thereon from the date hereof on the unpaid
Principal Amount, on the terms and conditions as hereinafter specified, until
the Principal Amount is repaid in full.
1. Identification of Debenture. This Debenture is the "Debenture"
defined in that certain Debenture Agreement and Security Agreement of even date
herewith between the Company and the Holder (the "Debenture Agreement") and the
Holder is entitled to all of the benefits that arise under the Debenture
Agreement from being the "Investor" and the holder of the "Debenture"
thereunder.
2. Payment of Principal and Interest.
(a) The Principal Amount shall be payable on January 10, 2000
("Principal Repayment Date", also herein referred to as the "Maturity Date"). At
the Maturity Date, any final Prepayment (as defined in Section 3 below), any
acceleration of the Principal Amount pursuant to Section 8
1
<PAGE>
below, any unpaid Principal Amount of this Debenture, all interest accrued
thereon and other sums payable hereunder shall be due and payable in full,
notwithstanding any other provision hereof.
(b) From and after the date hereof, interest on the unpaid balance of
the Principal Amount shall accrue at the per annum rate of six percent (6%) (the
"Interest Rate") and shall be due and payable upon the Maturity Date, provided
that upon any Prepayment and any acceleration of the Principal Amount pursuant
to Section 8 below, all accrued and unpaid interest on the principal amount of
the Prepayment or on the accelerated Principal Amount shall be immediately due
and payable. Interest shall be calculated on the basis of a 365-day year and the
actual number of days elapsed. In the event that all or any portion of the
Principal Amount is not paid on the scheduled payment date of this Debenture or
upon acceleration (regardless of the reason therefor), the portion of the
Principal Amount not paid when due shall bear interest until paid at the
"Default Rate" (as defined in Section 8 below).
(c) All portions of the Principal Amount, all interest thereon and all
other sums due hereunder, shall be payable, without set-off or deduction, at the
offices of the Holder set forth above or at such other place as Holder, from
time to time may designate to the Company in writing, in cash, certified check
or check of the Company that the Holder has agreed in writing in advance to
accept or a wire transfer to such account as Holder may have previously
designated to the Company in writing.
3. Prepayment. The Company may prepay any portion of the Principal
Amount without penalty or premium, upon five (5) days' written notice to Holder
(a "Prepayment"). Any Prepayments shall be applied first to any overdue payments
of principal or interest that bear interest at the "Default Rate", next to any
other accrued but unpaid interest and then to reduction of principal of the
Principal Amount.
If a Change in Control (as hereinafter defined) occurs, the Holder may,
by notice to the Company given not later than the date 10 days after the date
the Company has notified the Holder of such Change in Control, require the
prepayment of the entire unpaid Principal Amount of this Debenture and all
accrued but unpaid interest thereon; whereupon the Company shall, on the date 10
days after the date such notice is given by the Holder, prepay this Debenture.
The Company shall give the Holder notice of the occurrence of any Change in
Control not later than 10 days after such Change in Control occurred.
As used herein, "Change in Control" of the Company means:
(a) any "person", as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), (other than the Company, any trustee or other fiduciary holding
securities under an employee benefit plan of the Company, or any
corporation owned, directly or indirectly, by the stockholders of the
Company in substantially the same proportions as their ownership of
stock of the Company), is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly
2
<PAGE>
or indirectly, of securities of the Company representing 30% or more of
the combined voting power of the Company's then outstanding securities;
(b) during any period of two consecutive years (not including
any period prior to the date of this Debenture), individuals who at the
beginning of such period constitute the Board, and any new director
(other than a director designated by a person who has entered into an
agreement with the Company to effect a transaction described in
paragraph (a), (c) or (d) of this Section) whose election by the Board
of Directors or nomination for election by the Company's stockholders
was approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so
approved, cease for any reason to constitute at least a majority
thereof;
(c) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than (I)
a merger or consolidation which would result in the voting securities
of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity) more than 80% of the
combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or
consolidation or (II) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no
"person" (as hereinabove defined) acquires more than 30% of the
combined voting power of the Company's then outstanding securities; or
(d) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets.
4. Exchange of Debenture. At the option of the Holder, this Debenture
may be exchanged for other Debentures in denominations of $1,000 and any
integral multiple thereof and of a like aggregate principal amount and tenor.
Upon surrender of this Debenture to the Company for exchange, the Company shall
execute and deliver to the Holder the Debentures which the Holder is entitled to
receive in exchange.
5. Ranking of Obligations. The obligations of the Company hereunder do
rank and will rank at least pari passu in priority of payment with all other
indebtedness of the Company.
6. Covenants. Until satisfaction in full of all obligations of the
Company under this Debenture, the Company shall at all times comply with all of
the covenants of the Company set forth herein or in the Debenture Agreement,
which are hereby incorporated by reference herein as if each such covenant was
set forth in full in this Debenture, together with any necessary defined terms
from the Debenture Agreement.
3
<PAGE>
7. Events of Default. The following events are hereby defined for all
purposes of this Debenture as Events of Default:
(a) Failure of the Company to pay any principal or interest
hereunder when and as the same shall become due and payable, which
failure shall have continued for a period of 5 days after receiving
written notice of such late payment.
(b) The breach by the Company of any of the other covenants
set forth in this Debenture or in the Debenture Agreement if such
breach is not cured within 30 days after written notice thereof is
given by the Holder.
(c) The institution by the Company of proceedings to be
adjudicated a bankrupt or insolvent, or the consent by it to the
institution of bankruptcy or insolvency proceedings against it, or the
filing by it of a petition or answer or consent seeking relief under
Title 11 of the United States Code, as now constituted or hereafter in
effect, or any other applicable Federal or State bankruptcy, insolvency
or other similar law, or the consent by it to the institution of
proceedings thereunder or the filing of any such petition or to the
appointment of a receiver, liquidator, assignee, trustee, custodian,
sequestrator (or other similar official) of the Company or of any
substantial part of its property, or the making by the Company of an
assignment for the benefit of creditors, or the admission by the
Company in writing of its inability to pay its debts generally as they
become due;
(d) The entry of a decree or order by a court having
jurisdiction for relief in respect of the Company, or adjudging the
Company a bankrupt or insolvent, or approving as properly filed a
petition seeking reorganization, arrangement, adjustment or composition
of or in respect of the Company under Title 11 of the United States
Code, as now constituted or hereafter in effect, or any other
applicable Federal or State bankruptcy, insolvency or other similar
law, or appointing a receiver, liquidator, assignee, trustee (or other
similar official) of the Company or of any substantial part of its
property, or ordering the winding-up or liquidation of its affairs, and
the continuance of any such decree or order unstayed and in effect for
a period of 60 consecutive days; or
(e) A default shall occur under any other agreement, document
or instrument to which the Company is a party and such default is not
cured within any applicable grace period or waived in writing, and such
default (i) involves the failure to make any payment when due in
respect of any indebtedness (other than the Principal Amount and
interest thereon) of the Company in excess of Five Hundred Thousand
Dollars ($500,000) in the aggregate, or (ii) causes such indebtedness
or a portion thereof in excess of Five Hundred Thousand Dollars
($500,000) in the aggregate to become due prior to its stated maturity
or prior to its regularly scheduled dates of payment, or (iii) permits
any holder of such indebtedness or a trustee to cause such indebtedness
or a portion thereof in excess of Five Hundred Thousand Dollars
($500,000) in the aggregate to become due prior to its stated
4
<PAGE>
maturity or prior to the regularly scheduled dates of payment and such
default is not cured or waived within 30 days after the occurrence
thereof.
If one or more Events of Default shall happen and be continuing, then,
and in each and every such case, the Holder, at its option, by notice in writing
to the Company, may declare the entire Principal Amount and all interest accrued
thereon and any other sums due hereunder, if not already due and payable, to be
immediately due and payable. If there shall occur an Event of Default described
in Sections 8(c) or 8(d), the entire unpaid balance of the Principal Amount with
interest accrued thereon and all other sums due under this Debenture shall be
immediately due and payable without notice to the Company. If the entire unpaid
balance with interest accrued thereon shall, as a result of either of the
preceding two sentences, be immediately due and payable, the unpaid balance of
the Principal Amount shall accrue interest at the Interest Rate compounded
annually to the date of default and thereafter at a rate which shall be equal to
the Interest Rate plus two percent (2%) (the "Default Rate") and all other sums
due by the Company hereunder shall also be immediately due and payable; and
payment thereof may be enforced and recovered in whole or in part at any time by
one or more of the remedies provided to the Holder in this Debenture or under
applicable law. In such case, the Holder may also recover all costs of suit and
other expenses in connection therewith, together with reasonable attorney's fees
for collection, together with the interest on any judgment obtained by the
Holder at the Default Rate, including interest at that rate from and after the
date of any execution, judicial or foreclosure sale until actual payment is made
to the Holder of the full amount due the Holder.
8. Payment on Default. In the event that an Event of Default shall
occur, then the Company shall pay to the Holder the whole amount which then
shall have become due on the Debenture for principal and interest, and in
addition thereto, such additional amount as shall be sufficient to cover the
costs and expenses of collection.
No delay or omission of the Holder to exercise any rights or powers
accruing upon any default which shall not have been remedied shall impair any
such right or power, or shall be construed to be a waiver of any such default or
acquiescence therein; and every power and remedy given by this to the Holder may
be exercised from time to time and as often as may be deemed expedient by the
Holder.
9. Immunity of Incorporators, Stockholders, Officers, Directors and
Employees. No recourse shall be had for the payment of the principal or interest
on this Debenture or for any claim based thereon or otherwise in any manner in
respect thereof, to or against any subsidiary, incorporator, stockholder,
officer, director or employee, as such, past, present or future, of the Company
or any respective subsidiary, incorporator, stockholder, officer, director or
employees, as such, past, present or future, of any predecessor or successor
corporation, either directly or through the Company or such predecessor or
successor corporation, whether by virtue of any constitutional provision or
statute or rule of law, or by the enforcement of any assessment or penalty, or
in any other manner, all such liability being expressly waived and released by
the acceptance of this Debenture and as part of the consideration for the issue
thereof.
5
<PAGE>
10. Notices. Unless otherwise provided, any notice required or
permitted under this Debenture shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with a reputable overnight courier or with the United States Post
Office, by registered or certified mail, postage prepaid and addressed to the
party to be notified at the address indicated for such party in the Debenture
Agreement, or at such other address as such party may designate by ten (10) days
advance written notice to the other party.
11. Miscellaneous.
(a) The Company hereby waives presentment, demand, protest, notice of
demand, notice of nonpayment or dishonor, notice of protest and all other
notices of any kind in connection with the delivery, acceptance, performance
default or enforcement of the payment of this Debenture. No failure to exercise,
and no delay in exercising any rights hereunder on the part of the Holder hereof
shall operate as a waiver of such rights.
(b) The Holder and the Company may from time to time enter into written
agreements amending or changing any provisions of this Debenture or the
Debenture Agreement or the rights of the Holder or the Company hereunder or
thereunder, or may grant written waivers or consents to a departure from the due
performance of the obligations of the Company hereunder or thereunder.
(c) The Company agrees that its liability under this Debenture shall be
unconditional, without regard to the liability of any other party, and shall not
be affected in any manner by any indulgence, extension of time, renewal, waiver
or modification granted or consented to by the Holder. No course of dealing and
no delay or failure of the Holder in exercising any right, power, remedy or
privilege under this Debenture or the Debenture Agreement shall affect any other
or future exercise thereof or operate as a waiver thereof; nor shall any single
or partial exercise thereof or any abandonment or discontinuance of steps to
enforce such a right, power, remedy of privilege preclude any further exercise
thereof or of any other right, power, remedy or privilege. The rights and
remedies of the Holder under this Debenture and the Debenture Agreement are
cumulative and not exclusive of any rights or remedies which they would
otherwise have. Any waiver, permit, consent or approval of any kind or character
on the part of the Holder of any breach or default under this Debenture or any
such waiver of any provision or condition of this Debenture must be in writing
and shall be effective only to the extent specifically set forth in such
writing.
(d) Whenever any payment or action to be made or taken hereunder shall
be stated to be due on a day which is not a business day, such payment or action
shall be made or taken on the next following business day, and such extension of
time shall be included in computing interest or fees, if any, in connection with
such payment or action.
(e) All notices, requests, demands, directions and other communications
(collectively, "notices") given to or made upon any party hereto under the
provisions of this Debenture shall be in writing and shall be effective if given
in accordance with the provisions of the Debenture Agreement.
6
<PAGE>
(f) The provisions of this Debenture are intended to be severable. If
any provision of this Debenture shall be held invalid or unenforceable in whole
or in part in any jurisdiction such provision shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without in any
manner affecting the validity or enforceability thereof in any other
jurisdiction or the remaining provisions hereof in any jurisdiction.
(g) This Debenture and the Debenture Agreement and other documents
delivered in connection herewith and therewith supersede all prior
understandings and agreements, whether written or oral, between the parties
hereto and thereto relating to the transactions provided for herein and therein.
Any Holder of this Debenture acknowledges that such Holder is bound by the
applicable provisions of the Debenture Agreement and by the acceptance of this
Debenture such Holder agrees to the terms thereof.
(h) All representations and warranties of the Company contained herein
or made in connection herewith shall survive and shall not be waived by the
execution and delivery of this Debenture or by any investigation by the Holder,
but shall terminate upon Company's full satisfaction and payment of all
outstanding amounts in the Principal Amount of or interest on this Debenture.
(i) This Debenture shall be binding upon and shall inure to the benefit
of the Holder, the Company and their respective successors and assigns, except
that the Company may not assign or transfer any of its rights and obligations
hereunder or any interest herein.
(j) Whenever the Holder's consent is required to be obtained under this
Debenture or the Debenture Agreement as a condition to any action, inaction,
condition or event, the Holder shall be authorized to give or withhold such
consent in its sole and absolute discretion and to condition its consent upon
the giving of additional collateral, the payment of money or any other matter.
(k) The representations, warranties and covenants contained herein
shall be independent of each other and no exception to any representation,
warranty or covenant shall be deemed to be an exception to any other
representation, warranty or covenant contained herein unless expressly provided,
nor shall any such exceptions be deemed to permit any action or omission that
would be in contravention of applicable law.
(l) This Debenture shall be governed by, and construed in accordance
with, the laws of the State of Utah, excluding, however, the rules relating to
conflicts of law.
(m) In no event shall the rate of interest payable under this Debenture
exceed the maximum rate of interest permitted to be charged by applicable law
(including the choice of law rules) and any interest paid in excess of the
permitted rate shall be refunded to the Company. Such refund shall be made by
application of the excessive amount of interest paid against any sums
outstanding and shall be applied in such order as the Holder may determine. If
the excessive amount of interest paid exceeds the sums outstanding, the portion
exceeding the said sums outstanding shall
7
<PAGE>
be refunded in cash by the Holder. Any such crediting or refund shall not cure
or waive any default by the Company hereunder. The Company agrees, however, that
in determining whether or not any interest payable under this Debenture exceeds
the highest rate permitted by law, any non-principal payment, other than
interest payments, including, without limitation, fees and late charges, shall
be deemed, to the extent permitted by law, to be an expense, fee, premium or
liquidated damages, rather than interest.
(n) THE COMPANY AND THE HOLDER HEREBY WAIVE TRIAL BY JURY IN ANY
ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND DIRECTLY OR INDIRECTLY
ARISING OUT OF OR RELATED TO THIS DEBENTURE OR THE DEBENTURE AGREEMENT OR ANY
ACT OR OMISSION WHICH EITHER PARTY ASSERTS RESULTED IN ANY LIABILITY TO THE
COMPANY, THE HOLDER OR THEIR RESPECTIVE OFFICERS, DIRECTORS, STOCKHOLDERS,
PARTNERS, EMPLOYEES OR AGENTS, TO THE FULL EXTENT PERMITTED BY LAW.
(o) To the extent the Company fails to make payment of principal or
interest when due under this Debenture, Holder may setoff the amount of such
deficiency against "Royalty Amounts" (net of any commission that the Company
would be required to pay (e.g., Coalco)) due and owing to the Company from the
Holder. For purposes of this paragraph (o), "Royalty Amounts" shall mean
royalties and license fees due to the Company either from the Holder or from any
of the Holder's assigns or transferees that may owe a royalty or license fee to
the Company.
IN WITNESS WHEREOF, the Company, intending to be legally bound hereby,
has caused this Debenture to be duly executed by its respective authorized
officers on the day and year first above written.
COVOL TECHNOLOGIES, INC.
By: /Stanley M. Kimball/
-------------------------
Name: Stanley M. Kimball
Title: President
[Corporate Seal]
Attest: /Asael T. Sorensen, Jr./
----------------------------
Asael T. Sorensen, Jr., Secretary
Accepted and Agreed to as of
the first day referred to above
AJG FINANCIAL SERVICES, INC.
By:/David R. Long/
---------------------
Name: David R. Long
Title: President
8
WARRANT A
Dated: January 9, 1998 Warrant No. WA-1997-245
**216,272** Shares
NEITHER THESE WARRANTS NOR THE SHARES OF COMMON STOCK ISSUABLE UPON
EXERCISE OF THESE WARRANTS HAVE BEEN REGISTERED WITH THE U.S. SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON
AN EXEMPTION FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THESE WARRANTS AND THE SHARES OF
COMMON STOCK ISSUABLE UPON EXERCISE OF THESE WARRANTS ARE RESTRICTED AND MAY NOT
BE OFFERED OR SOLD EXCEPT PURSUANT TO REGULATION D UNDER THE ACT, AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT OR PURSUANT TO AN APPLICABLE EXEMPTION
THEREFROM.
These Warrants shall cease to be exercisable and shall be void
after January 10, 2000, at 5:00 p.m.,
Salt Lake City, Utah time.
COMMON STOCK PURCHASE WARRANTS
OF
COVOL TECHNOLOGIES, INC.
FOR VALUE RECEIVED, Covol Technologies, Inc. (the "Company"), a
Delaware corporation, hereby certifies that AJG Financial Services, Inc., or its
permitted assigns, is entitled to purchase from the Company, subject to the
conditions and upon the terms of this Warrant, at any time or from time to time
after the date hereof and prior to 5:00 p.m. Salt Lake City, Utah time, on
January 10, 2000, an aggregate of 216,272 fully paid and nonassessable shares of
Common Stock, par value $.001, of the Company (subject to adjustment as provided
herein), at a per share exercise price of $10.00 per share (subject to
adjustment as provided herein). This Warrant is issued pursuant to the terms set
forth in a letter agreement dated October 22, 1997, by and between the Holder
(as defined below) and the Company (the "Letter Agreement").
1. Definitions.
As used in this Warrant, the following terms have the respective
meanings set forth below:
"Additional Shares of Common Stock" shall mean all shares of Common
Stock issued by the Company after the Closing Date, other than Warrant Shares.
1
<PAGE>
"Affiliate" of any Person shall mean a Person that directly or
indirectly, through one or more intermediaries, controls or is controlled by or
is under common control with, such Person.
"Appraised Value" shall mean, in respect of any share of Common Stock
on any date herein specified, the fair market value of such share of Common
Stock (determined without giving effect to the discount for (i) a minority
interest, or (ii) any lack of liquidity of the Common Stock or to the fact that
the Company may have no class of equity registered under the Exchange Act, based
on the quotient obtained by dividing (x) the value of the Company, as determined
by an investment banking firm selected in accordance with the terms of Section
12, by (y) the number of Fully Diluted Outstanding shares of Common Stock.
"Book Value" shall mean, in respect of any share of Common Stock on any
date herein specified, the consolidated book value of the Company (with
inventory valued on a first-in-first-out basis) applicable to Common Stock as of
the last day of any month immediately preceding such date, divided by the number
of Fully Diluted Outstanding shares of Common Stock as determined in accordance
with GAAP by Price Waterhouse Coopers LLP or any other firm of independent
certified public accountants of recognized national standing selected by the
Company and reasonably acceptable to the Majority Holders, determined in any
event without any adjustment or reduction for the amount, if any, that may,
under modifications to GAAP adopted after the Closing Date, be required either
as an offset to or reserve against earnings or retained earnings, or as a
deduction from book value or net worth, in either event as a result of the
exercise, issuance, anticipated exercise or anticipated cost to the Company of
any stock option, right or convertible security or any provision of the Warrants
or any other warrant issued by the Company.
"Business Day" shall mean any day that is not a Saturday or Sunday or a
day on which banks are required or permitted to be closed in the State of Utah
or the State of Illinois.
"Closing Date" shall mean January 9, 1998.
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency then administering the Securities Act and other federal
securities laws.
"Common Stock" shall mean (except where the context otherwise
indicates) the Common Stock, $0.001 par value, of the Company as constituted on
the Closing Date, and any capital stock into which such Common Stock may
thereafter be changed, and shall also include (i) capital stock of the Company
of any other class (regardless of how denominated) issued to the holders of
shares of Common Stock upon any reclassification thereof which is also not
preferred as to dividends or assets over any other class of stock of the Company
and which is not subject to redemption and (ii) shares of common stock of any
successor or acquiring corporation (as defined in Section 4.8) received by or
distributed to the holders of Common Stock of the Company in the circumstances
contemplated by Section 4.8.
2
<PAGE>
"Convertible Securities" shall mean evidences of indebtedness, shares
of stock or other securities which are convertible into or exchangeable, with or
without payment of additional consideration in cash or property, for Additional
Shares of Common Stock, either immediately or upon the occurrence of a specified
date or a specified event.
"Current Market Price" shall mean, in respect of any share of Common
Stock on any date herein specified, the highest of (a) the Book Value per share
of Common Stock at such date, (b) the Appraised Value per share of Common Stock
as of a date which is within 120 days of such date, (c) the fair market value
thereof as determined in good faith by the Board of Directors of the Company as
of a date which is within 15 days of such date, or (d) if there shall then be a
public market for the Common Stock, the average of the daily market prices for
the 30 consecutive Business Days immediately preceding such date. The daily
market price for each such Business Day shall be (i) the last sale price on such
day on the principal stock exchange on which such Common Stock is then listed or
admitted to trading, (ii) if no sale takes place on such day on any such
exchange, the last reported sale price as officially quoted on any such
exchange, (iii) if the Common Stock is not then listed or admitted to trading on
any stock exchange, the last sale price on such day in the over-the-counter
market, as reported by the National Association of Securities Dealers Automatic
Quotation System ("NASDAQ"), or if such sale price is not available on such
date, the average of the closing bid and asked prices on such date as reported
by NASDAQ, or if not so reported, then as reported by the National Quotation
Bureau, Inc., (iv) if neither such firm at the time is engaged in the business
of reporting such prices, as furnished by any similar firm then engaged in such
business, or (v) if there is no such firm, as furnished by any member of the
NASD selected mutually by the Majority Holders and the Company or, if they
cannot agree upon such selection, as selected by two such members of the NASD,
one of which shall be selected by the Majority Holders and one of which shall be
selected by the Company.
"Current Warrant Price" shall mean, in respect of a share of Common
Stock at any date herein specified, the price at which a share of Common Stock
may be purchased pursuant to this Warrant on such date. On the Closing Date, the
Current Warrant Price is $10.00 per share of Common Stock.
"Debenture Agreement" shall mean the Debenture Agreement and Security
Agreement, dated as of January 9, 1998, between the Company and AJG Financial
Services, Inc.
"Default Rate" means eight percent (8%).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect from time to time.
"Exercise Period" shall mean the period during which this Warrant is
exercisable pursuant to Section 2.
3
<PAGE>
"Fully Diluted Outstanding" shall mean, when used with reference to
Common Stock, at any date as of which the number of shares thereof is to be
determined, all shares of Common Stock Outstanding at such date and all shares
of Common Stock issuable in respect of this Warrant outstanding on such date and
other options or warrants to purchase, or securities convertible into, shares of
common stock outstanding on such date which would be deemed outstanding in
accordance with GAAP for purposes of determining book value or net income per
share.
"GAAP" shall mean generally accepted accounting principles in the
United States of America as from time to time in effect.
"Holder" shall mean, as the context requires, the Person in whose name
this Warrant or one of the other Warrants is registered on the books of the
Company maintained for such purpose or the Person holding any Warrant Shares,
and "Holders" shall mean two or more such Persons.
"Independent Counsel" shall mean counsel to the Company, unless counsel
to Holder disagrees in writing with the opinion or advice of such counsel with
respect to the issue in question within fifteen (15) days after receipt of such
opinion or advice, in which case the Company and Holder shall select another
counsel, not the regular counsel of either, who is experienced in Securities Act
matters, who shall render an opinion with respect to the issue in question. The
legal fees and expenses of such other counsel incurred in connection with the
rendering of such opinion shall be borne equally by Holder and the Company.
"Letter Agreement" shall have the meaning set forth in the first
paragraph of this Warrant.
"Majority Holders" shall mean the Holders of Warrants exercisable for
in excess of 50% of the aggregate number of shares of Common Stock then
purchasable upon exercise of all Warrants, whether or not then exercisable.
"NASD" shall mean the National Association of Securities Dealers, Inc.,
or any successor corporation thereto.
"Other Property" shall have the meaning set forth in Section 4.8.
"Outstanding" shall mean, when used with reference to Common Stock, at
any date as of which the number of shares thereof is to be determined, all
issued shares of Common Stock, except shares then owned or held by or for the
account of the Company or any Subsidiary, and shall include all shares issuable
in respect of outstanding scrip or any certificates representing fractional
interests in shares of Common Stock.
"Permitted Issuances" shall mean [(i) the issuance of up to 800,000
shares of Common Stock pursuant to certain outstanding warrants of the Company
which are "out of the money" as of the Closing Date, (ii) the issuance of up to
1,500,000 shares of Common Stock pursuant to certain outstanding options,
warrants or other securities of the Company convertible into Common Stock
4
<PAGE>
which are "in the money" as of the Closing Date, (iii) the issuance of or
granting of rights to acquire up to 790,000 shares of Common Stock to PacifiCorp
Financial Services, inc. or any of its affiliates ('PacifiCorp"), or their
respective assigns, pursuant to the Convertible Loan and Security Agreement,
dated, between the Company and PacifiCorp, (iv) the issuance of or granting of
rights to acquire up to 515,000 shares of Common Stock to be sold by the Company
pursuant to a private Placement Memorandum, (v) the issuance of or granting of
rights to acquire up to 100,000 shares of Common Stock to LKD Partnership or its
assigns pursuant to a Convertible Debenture in the principal amount of
approximately $1,000,000 issued in November, 1996, (vi) the issuance of or
granting of rights to acquire up to 2,000,000 shares of Common Stock to
officers, directors, consultants or employees of the Company, which rights vest
over the next 8 to 9 years, (vii) the issuance of or granting of rights to
acquire up to 400,000 additional shares of Common Stock to any third parties in
transactions other than those referred to in the preceding clauses (i) through
(vi)], and (viii) the issuance of shares of Common Stock upon exercise of the
Warrants.
"Person" shall mean any individual, sole proprietorship, partnership,
joint venture, trust, incorporated organization, association, corporation,
institution, public benefit corporation, entity or government (whether federal,
state, county, city, municipal or otherwise, including, without limitation, any
instrumentality, division, agency, body or department thereof).
"Registration Rights Agreement" shall mean the Registration Rights
Agreement, dated as of January 9, 1998, between the Company and AJG Financial
Services, Inc.
"Restricted Common Stock" shall mean shares of Common Stock which are,
or which upon their issuance on the exercise of this Warrant would be, evidenced
by a certificate bearing the restrictive legend set forth in Section 8.1.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Subsidiary" shall mean any corporation of which an aggregate of more
than 50% of the outstanding stock having ordinary voting power to elect a
majority of the board of directors of such corporation (irrespective of whether,
at the time, stock of any other class or classes of such corporation shall have
or might have voting power by reason of the happening of any contingency) is at
the time, directly or indirectly, owned legally or beneficially by the Company
and/or one or more Subsidiaries of the Company.
"Termination Date" shall have the meaning set forth in Section 2.
"Transfer" shall mean any disposition of any Warrant or Warrant Shares
or of any interest in either thereof, which would constitute a sale thereof
within the meaning of the Securities Act.
5
<PAGE>
"Warrant Price" shall mean an amount equal to (i) the number of shares
of Common Stock being purchased upon exercise of this Warrant pursuant to
Section 2, multiplied by (ii) the Current Warrant Price as of the date of such
exercise.
"Warrant Shares" shall mean the shares of Common Stock purchased by
Holders of the Warrants upon the exercise thereof.
"Warrants" shall mean the two Warrants (one designated Warrant A and
the other designated Warrant B), each dated January 9, 1998, issued by the
Company to AJG Financial Services, Inc. evidencing rights to purchase initially
up to an aggregate of 432,544 shares of Common Stock, and all warrants issued
upon transfer, division or combination of, or in substitution or exchange for,
any thereof.
2. Exercise of Warrant. This Warrant may be exercised, in whole at any
time or in part from time to time during the period (the "Exercise Period")
commending on the date hereof, and ending on January 10, 2000, at 5:00 p.m. Salt
Lake City, Utah time (the "Termination Date"), by the Holder of this Warrant by
the surrender of this Warrant (with the exercise form at the end hereof duly
executed) at the address set forth in Section 13 hereof, together with payment
of the Warrant Price. Payment of the Warrant Price shall be made first by
offset, in whole or in part, against any obligation of the Company to the Holder
pursuant to the Debenture issued pursuant to the Debenture Agreement, and then
any balance by wire transfer to an account in a bank located in the United
States designated for such purpose by the Company or by certified or official
bank check. The Warrant shall expire, and exercise shall no longer be allowed,
to the extent the Warrant has not been exercised by the expiration of the
Exercise Period.
If this Warrant is exercised in part, this Warrant must be exercised
for a minimum of 1,000 shares of Common Stock and if the Exercise Period has not
expired the Holder is entitled to receive a new Warrant covering the number of
Warrant Shares in respect of which this Warrant has not been exercised and
setting forth the proportionate part of the Warrant Price applicable to such
Warrant Shares. Upon such surrender of this Warrant, the Company will (a) issue
a warrant or warrants in the name of the Holder for the largest number of whole
shares of Common Stock to which the Holder shall be entitled and, if this
Warrant is exercised in whole, in lieu of any fractional share of the Common
Stock to which the Holder shall be entitled, cash equal to the fair value of
such fractional share (determined in such reasonable manner as the Board of
Directors of the Company shall determine), and (b) deliver the proportionate
part thereof if this Warrant is exercised in part, pursuant to the provisions of
this Warrant. The Warrant shall expire, and exercise shall no longer be allowed,
to the extent the Warrant has not been exercised by the expiration of the
Exercise Period.
3. Reservation of Warrant Shares. The Company will at all times during
the Exercise Period have authorized and reserved, and will keep available,
solely for issuance or delivery upon the exercise of this Warrant, the Warrant
Shares. All shares of Common Stock which shall be so issuable, when issued upon
exercise of any Warrant and payment therefor in accordance with the terms of
such Warrant, shall be duly and validly issued, fully paid and nonassessable and
free and
6
<PAGE>
clear of any liens, claims and restrictions (other than as provided herein). No
stockholder of the Company has or shall have any preemptive rights to subscribe
for such shares of Common Stock.
Before taking any action which would cause an adjustment reducing the
Current Warrant Price below the then par value, if any, of the shares of Common
Stock issuable upon exercise of the Warrants, the Company shall take any
corporate action which may be necessary in order that the Company may validly
and legally issue fully paid and nonassessable shares of such Common Stock at
such adjusted Current Warrant Price.
Before taking any action which would result in an adjustment in the
number of shares of Common Stock for which this Warrant is exercisable or in the
Current Warrant Price, the Company shall obtain all such authorizations or
exemptions thereof, or consents thereto, as may be necessary from any public
regulatory body or bodies having jurisdiction thereof.
If any shares of Common Stock required to be reserved for issuance upon
exercise of Warrants require registration or qualification with any governmental
authority under any federal or state law (otherwise than as provided in Section
8) before such shares may be so issued, the Company will in good faith and as
expeditiously as possible and at its expense endeavor to cause such shares to be
duly registered.
4. Adjustments.
The number of shares of Common Stock for which this Warrant is
exercisable, or the price at which such shares may be purchased upon exercise of
this Warrant, shall be subject to adjustment from time to time as set forth in
this Section 4. The Company shall give Holder notice of any event described
below which requires an adjustment pursuant to this Section 4 at the time of
such event.
4.1 Stock Dividends, Subdivisions and Combinations. If at any time the
Company shall:
(a) take a record of the holders of its Common Stock for
the purpose of entitling them to receive a dividend
payable in, or other distribution of, Additional
Shares of Common Stock,
(b) subdivide its outstanding shares of Common Stock into
a larger number of shares of Common Stock, or
(c) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock,
then (i) the number of shares of Common Stock for which this Warrant is
exercisable immediately after the occurrence of any such event shall be adjusted
to equal the number of shares of Common Stock which a record holder of the same
number of shares of Common Stock for which this Warrant
7
<PAGE>
is exercisable immediately prior to the occurrence of such event would own or be
entitled to receive after the happening of such event, and (ii) the Current
Warrant Price shall be adjusted to equal (a) the Current Warrant Price
multiplied by the number of shares of Common Stock for which this Warrant is
exercisable immediately prior to the adjustment divided by (b) the number of
shares for which this Warrant is exercisable immediately after such adjustment.
4.2 Certain Other Distributions. If at any time the Company shall take
a record of the holders of its Common Stock for the purpose of entitling them to
receive any dividend or other distribution of:
(a) cash;
(b) any evidences of its indebtedness, any shares of its
stock or any other securities or property of any
nature whatsoever (other than cash, Convertible
Securities or Additional Shares of Common Stock); or
(c) any warrants or other rights to subscribe for or
purchase any evidences of its indebtedness, any
shares of its stock or any other securities or
property of any nature whatsoever (other than cash,
Convertible Securities or Additional Shares of Common
Stock);
then (i) the number of shares of Common Stock for which this Warrant is
exercisable shall be adjusted to equal the product obtained by multiplying the
number of shares of Common Stock for which this Warrant is exercisable
immediately prior to such adjustment by a fraction (a) the numerator of which
shall be the Current Market Price per share of Common Stock at the date of
taking such record and (b) the denominator of which shall be such Current Market
Price per share of Common Stock, minus the amount allocable to one share of
Common Stock of (x) any such cash so distributable and (y) the fair value (as
determined in good faith by the Board of Directors of the Company and supported
by an opinion from an investment banking firm of recognized national standing
acceptable to the Majority Holders) of any and all such evidences of
indebtedness, shares of stock, other securities or property or warrants or other
subscription or purchase rights so distributable, and (ii) the Current Warrant
Price shall be adjusted to equal (a) the Current Warrant Price multiplied by the
number of shares of Common Stock for which this Warrant is exercisable
immediately prior to the adjustment divided by (b) the number of shares for
which this Warrant is exercisable immediately after such adjustment. A
reclassification of the Common Stock (other than a change in par value, or from
par value to no par value or from no par value to par value) into shares of
Common Stock and shares of any other class of stock shall be deemed a
distribution by the Company to the holders of its Common Stock of such shares of
such other class of stock within the meaning of this Section 4.2 and, if the
outstanding shares of Common Stock shall be changed into a larger or smaller
number of shares of Common Stock as a part of such reclassification, such change
shall be deemed a subdivision or combination, as the case may be, of the
outstanding shares of Common Stock within the meaning of Section 4.1.
8
<PAGE>
4.3 Issuance of Additional Shares of Common Stock.
(a) If at any time the Company shall (except as
hereinafter provided in Sections 4.4 and 4.5) issue
or sell any Additional Shares of Common Stock, other
than Permitted Issuances, for consideration in an
amount per Additional Share of Common Stock less than
the greater of the Current Warrant Price or the
Current Market Price, then: (i) the number of shares
of Common Stock for which this Warrant is exercisable
shall be adjusted to equal the product obtained by
multiplying the number of shares of Common Stock for
which this Warrant is exercisable immediately prior
to such issue or sale by a fraction (W) the numerator
of which is the number of shares of Common Stock
Outstanding immediately after the issuance or sale of
such Additional Shares of Common Stock, and (X) the
denominator of which is number of shares of Common
Stock Outstanding immediately prior to such issuance
or sale; and (ii) the Current Warrant Price shall be
adjusted to a price determined by dividing (a) an
amount equal to the sum of (X) the number of shares
of Common Stock Outstanding immediately prior to such
issuance or sale multiplied by the then existing
Current Warrant Price, plus (Y) the consideration, if
any, received by the Company upon such issuance or
sale, by (b) the total number of shares of Common
Stock Outstanding immediately after such issuance or
sale.
(b) If at any time the Company shall (except as
hereinafter provided in Sections 4.4 and 4.5) issue
or sell any Additional Shares of Common Stock, other
than Permitted Issuances, for consideration in an
amount per Additional Share of Common Stock equal to
or greater than the greater of the Current Warrant
Price or the Current Market Price, then the number of
shares for which this Warrant is exercisable shall
not change, but the Company shall issue to Holder a
new Warrant for the number of shares of Common Stock
equal to (i) the product obtained by multiplying the
number of shares of Common Stock for which this
Warrant is exercisable immediately prior to such
issuance or sale by a fraction (W) the numerator of
which is the number of shares of Common Stock
Outstanding immediately after the issuance or sale of
such Additional Shares of Common Stock, and (X) the
denominator of which is the number of shares of
Common Stock Outstanding immediately prior to such
issuance or sale, less (ii) the number of shares for
which this Warrant is exercisable immediately prior
to such issuance or sale. The new Warrant shall have
the same terms and provisions as this Warrant except
with respect to the number of shares for which it is
exercisable and except that the Current Warrant Price
(as defined in the new Warrant) for each share of
Common Stock for which such new Warrant is
exercisable shall be equal to the fair value of the
consideration per Additional Share of Common Stock.
9
<PAGE>
(c) The provisions of this Section 4.3 shall not apply to
any issuance of Additional Shares of Common Stock for
which an adjustment is provided under Section 4.1 or
4.2. No adjustment shall be made under this Section
4.3 upon the issuance of any Additional Shares of
Common Stock which are issued pursuant to the
exercise of any warrants or other subscription or
purchase rights or pursuant to the exercise of any
conversion or exchange rights in any Convertible
Securities, if any such adjustment shall previously
have been made upon the issuance of such warrants or
other rights or upon the issuance of such Convertible
Securities (or upon the issuance of any warrant or
other rights therefor) pursuant to Section 4.4 or
Section 4.5.
4.4 Issuance of Warrants or Other Rights. If at any time the Company
shall take a record of the holders of its Common Stock for the purpose of
entitling them to receive a distribution of, or shall in any manner (whether
directly or by assumption in a merger in which the Company is the surviving
corporation) issue or sell, any warrants (other than the Warrants) or other
rights to subscribe for or purchase any Additional Shares of Common Stock or any
Convertible Securities, whether or not the rights to exchange or convert
thereunder are immediately exercisable, and the price per share for which Common
Stock is issuable upon the exercise of such warrants or other rights or upon
conversion or exchange of such Convertible Securities shall be less than the
greater of the Current Warrant Price or the Current Market Price in effect
immediately prior to the time of such distribution, issue or sale, then the
number of shares of Common Stock for which this Warrant is exercisable and the
Current Warrant Price shall be adjusted as provided in Section 4.3(a) on the
basis that (i) the maximum number of Additional Shares of Common Stock issuable
pursuant to all such warrants or other rights or necessary to effect the
conversion or exchange of all such Convertible Securities shall be deemed to
have been issued and outstanding, (ii) the price per share for such Additional
Shares of Common Stock shall be deemed to be the lowest price per share at which
such Additional Shares of Common Stock are available to such holders, and (iii)
the Company shall have received all of the consideration, if any, payable for
such warrants or other rights as of the date of the actual issuance thereof. No
further adjustments of the number of shares of Common Stock for which this
Warrant is exercisable or of the Current Warrant Price shall be made upon the
actual issue of such Common Stock or of such Convertible Securities upon
exercise of such warrants or other rights or upon the actual issue of such
Common Stock upon such conversion or exchange of such Convertible Securities.
4.5 Issuance of Convertible Securities. If at any time the Company
shall take a record of the holders of its Common Stock for the purpose of
entitling them to receive a distribution of, or shall in any manner (whether
directly or by assumption in a merger in which the Company is the surviving
corporation) issue or sell, any Convertible Securities, whether or not the
rights to exchange or convert thereunder are immediately exercisable, and the
price per share for which Common Stock is issuable upon such conversion or
exchange shall be less than the greater of the Current Warrant Price or the
Current Market Price in effect immediately prior to the time of such issue or
sale, then the number of shares of Common Stock for which this Warrant is
exercisable and the Current Warrant Price shall be adjusted as provided in
Section 4.3(a) on the basis that (i) the maximum
10
<PAGE>
number of Additional Shares of Common Stock issuable upon the conversion or
exchange of all such Convertible Securities shall be deemed to have been issued
and outstanding, (ii) the price per share of such Additional Shares of Common
Stock shall be deemed to be the lowest possible price in any range of prices at
which such Additional Shares of Common Stock are available to such holders, and
(iii) the Company shall have received all of the consideration payable therefor,
if any, as of the date of actual issuance of such Convertible Securities. No
further adjustment of the number of shares of Common Stock for which this
Warrant is exercisable or of the Current Warrant Price shall be made under this
Section 4.5 upon the issuance of any Convertible Securities which are issued
pursuant to the exercise of any warrants or other subscription or purchase
rights therefor, if any such adjustment shall previously have been made upon the
issuance of such warrants or other rights pursuant to Section 4.4. No further
adjustments of the number of shares of Common Stock for which this Warrant is
exercisable or of the Current Warrant Price shall be made upon the actual issue
of such Common Stock upon conversion or exchange of such Convertible Securities
and, if any issue or sale of such Convertible Securities is made upon exercise
of any warrant or other right to subscribe for or to purchase or any warrant or
other right to purchase any such Convertible Securities for which adjustments
thereof have been or are to be made pursuant to other provisions of this Section
4, no further adjustments shall be made by reason of such issue or sale.
4.6 Superseding Adjustment. If, at any time after any adjustment of the
number of shares of Common Stock for which this Warrant is exercisable shall
have been made pursuant to Section 4.4 or Section 4.5 as the result of any
issuance of warrants, rights or Convertible Securities, and either
(a) such warrants or rights, or the right of conversion
or exchange in such other Convertible Securities,
shall expire, and all or a portion of such warrants
or rights, or the right of conversion or exchange
with respect to all or a portion of such other
Convertible Securities, as the case may be, shall not
have been exercised, or
(b) the consideration per share for which shares of
Common Stock are issuable pursuant to such warrants
or rights, or the terms of such other Convertible
Securities, shall be increased solely by virtue of
provisions therein contained for an automatic
increase in such consideration per share upon the
occurrence of a specified date or event,
then such previous adjustment shall be rescinded and annulled and the Additional
Shares of Common Stock which were deemed to have been issued by virtue of the
computation made in connection with the adjustment so rescinded and annulled
shall no longer be deemed to have been issued by virtue of such computation.
Thereupon, a recomputation shall be made of the effect of such rights or options
or other Convertible Securities on the then outstanding Warrants, but not on any
then outstanding Warrant Shares, on the basis of
11
<PAGE>
(c) treating the number of Additional Shares of Common
Stock or other property, if any, theretofore actually
issued or issuable pursuant to the previous exercise
of any such warrants or rights or any such right of
conversion or exchange, as having been issued on the
date or dates of any such exercise and for the
consideration actually received and receivable
therefor, and
(d) treating any such warrants or rights or any such
other Convertible Securities which then remain
outstanding as having been granted or issued
immediately after the time of such increase of the
consideration per share for which shares of Common
Stock or other property are issuable under such
warrants or rights or other Convertible Securities.
4.7 Other Provisions Applicable to Adjustments under this Section. The
following provisions shall be applicable to the making of adjustments provided
for in this Section 4:
(a) Computation of Consideration. To the extent that any
Additional Shares of Common Stock or any Convertible
Securities or any warrants or other rights to
subscribe for or purchase any Additional Shares of
Common Stock or any Convertible Securities shall be
issued for cash consideration, the consideration
received by the Company therefor shall be the amount
of the cash received by the Company therefor, or, if
such Additional Shares of Common Stock or Convertible
Securities are offered by the Company for
subscription, the subscription price, or, if such
Additional Shares of Common Stock or Convertible
Securities are sold to underwriters or dealers for
public offering without a subscription offering, the
initial public offering price (in any such case
subtracting any amounts paid or receivable for
accrued interest or accrued dividends, but not
subtracting any compensation, discounts or expenses
paid or incurred by the Company for and in the
underwriting of, or otherwise in connection with, the
issuance thereof). To the extent that such issuance
shall be for a consideration other than cash, then,
except as herein otherwise expressly provided, the
amount of such consideration shall be deemed to be
the fair value of such consideration at the time of
such issuance as determined in good faith by the
Board of Directors of the Company. In case any
Additional Shares of Common Stock or any Convertible
Securities or any warrants or other rights to
subscribe for or purchase such Additional Shares of
Common Stock or Convertible Securities shall be
issued in connection with any merger in which the
Company issues any securities, the amount of
consideration therefor shall be deemed to be the fair
value, as determined in good faith by the Board of
Directors of the Company, of such portion of the
assets and business of the nonsurviving corporation
as such Board in good faith shall determine to be
attributable to such Additional Shares of Common
Stock, Convertible Securities, warrants or other
rights, as the case may be. The consideration for any
Additional Shares of Common
12
<PAGE>
Stock issuable pursuant to any warrants or other
rights to subscribe for or purchase the same shall be
the consideration received by the Company for issuing
such warrants or other rights plus the additional
consideration payable to the Company upon exercise of
such warrants or other rights. The consideration for
any Additional Shares of Common Stock issuable
pursuant to the terms of any Convertible Securities
shall be the consideration, if any, received by the
Company for issuing warrants or other rights to
subscribe for or purchase such Convertible
Securities, plus the consideration paid or payable to
the Company in respect of the subscription for or
purchase of such Convertible Securities, plus the
additional consideration, if any, payable to the
Company upon the exercise of the right of conversion
or exchange in such Convertible Securities. In case
of the issuance at any time of any Additional Shares
of Common Stock or Convertible Securities in payment
or satisfaction of any dividends upon any class of
stock other than Common Stock, the Company shall be
deemed to have received for such Additional Shares of
Common Stock or Convertible Securities a
consideration equal to the amount of such dividend so
paid or satisfied.
(b) When Adjustments to Be Made. The adjustments required
by this Section 4 shall be made whenever and as often
as any specified event requiring an adjustment shall
occur, except that any adjustment of the number of
shares of Common Stock for which this Warrant is
exercisable that would otherwise be required may be
postponed (except in the case of a subdivision or
combination of shares of the Common Stock, as
provided for in Section 4.1) up to, but not beyond
the date of exercise if such adjustment either by
itself or with other adjustments not previously made
adds or subtracts less than 1% of the shares of
Common Stock for which this Warrant is exercisable
immediately prior to the making of such adjustment.
Any adjustment representing a change of less than
such minimum amount (except as aforesaid) which is
postponed shall be carried forward and made upon the
earlier of (i) the date upon which such adjustment,
together with other adjustments required by this
Section 4 and not previously made, would result in a
minimum adjustment, and (ii) the date of exercise.
For the purpose of any adjustment, any specified
event shall be deemed to have occurred at the close
of business on the date of its occurrence.
(c) Fractional Interests. In computing adjustments under
this Section 4, fractional interests in Common Stock
shall be taken into account to the nearest 1/10th of
a share.
(d) When Adjustment Not Required. If the Company shall
take a record of the holders of its Common Stock for
the purpose of entitling them to receive a dividend
or distribution or subscription or purchase rights
and shall,
13
<PAGE>
thereafter and before the distribution to
stockholders thereof, legally abandon its plan to pay
or deliver such dividend, distribution, subscription
or purchase rights, then thereafter no adjustment
shall be required by reason of the taking of such
record and any such adjustment previously made in
respect thereof shall be rescinded and annulled.
(e) Escrow of Warrant Shares. If after any property
becomes distributable pursuant to this Section 4 by
reason of the taking of any record of the holders of
Common Stock, but prior to the occurrence of the
event for which such record is taken, Holder
exercises this Warrant, any Additional Shares of
Common Stock issuable and other property
distributable upon exercise by reason of such
adjustment shall be held in escrow for Holder by the
Company to be issued to Holder upon and to the extent
that the event actually takes place, upon payment of
the then Current Warrant Price. Notwithstanding any
other provision to the contrary herein, if the event
for which such record was taken fails to occur or is
rescinded, then such escrowed shares shall be
canceled by the Company and escrowed property
returned.
(f) Challenge to Good Faith Determination. Whenever the
Board of Directors of the Company shall be required
to make a determination in good faith of the fair
value of any item under this Section 4, such
determination may be challenged in good faith by
Holder, and any dispute shall be resolved by an
investment banking firm of recognized national
standing selected by the Company and acceptable to
such Holder.
4.8 Reorganization, Reclassification, Merger, Consolidation or
Disposition of Assets. In case the Company shall reorganize its capital,
reclassify its capital stock, consolidate or merge with or into another
corporation (where the Company is not the surviving corporation or where there
is a change in or distribution with respect to the Common Stock of the Company),
or sell, transfer or otherwise dispose of all or substantially all its property,
assets or business to another corporation (hereinafter, a "Reorganization") and,
pursuant to the terms of such Reorganization, shares of common stock of the
successor or acquiring corporation, or any cash, shares of stock or other
securities or property of any nature whatsoever (including warrants or other
subscription or purchase rights) in addition to or in lieu of common stock of
the successor or acquiring corporation ("Other Property"), are to be received by
or distributed to the holders of Common Stock of the Company, then each Holder
shall have the right following the effectiveness of such Reorganization to
receive, upon exercise of such Warrant, the number of shares of common stock of
the successor or acquiring corporation or of the Company, if it is the surviving
corporation, and Other Property receivable upon or as a result of such
Reorganization by a holder of the number of shares of Common Stock for which
this Warrant is exercisable immediately prior to such event. In case of any such
Reorganization, the successor or acquiring corporation (if other than the
Company) shall expressly assume the due and punctual observance and performance
of each and every covenant and condition of this Warrant to be performed and
observed by the Company and all the obligations and liabilities
14
<PAGE>
hereunder, subject to such appropriate modifications as are satisfactory to the
Majority Holders in order to provide for adjustments of shares of the Common
Stock for which this Warrant is exercisable which shall be as nearly equivalent
as practicable to the adjustments provided for in this Section 4. For purposes
of this Section 4.8 "common stock of the successor or acquiring corporation"
shall include stock of such corporation of any class which is not preferred as
to dividends or assets over any other class of stock of such corporation and
which is not subject to redemption and shall also include any evidences of
indebtedness, shares of stock or other securities which are convertible into or
exchangeable for any such stock, either immediately or upon the arrival of a
specified date or the happening of a specified event and any warrants or other
rights to subscribe for or purchase any such stock. The foregoing provisions of
this Section 4.8 shall similarly apply to successive Reorganizations.
4.9 Other Action Affecting Common Stock. In case at any time or from
time to time the Company shall take any action in respect of its Common Stock,
other than the payment of dividends permitted by Section 4.2(a) or any other
action described in this Section 4, then, unless such action will not have a
materially adverse effect upon the rights of the Holders, the number of shares
of Common Stock or other stock for which this Warrant is exercisable and/or the
purchase price thereof shall be adjusted in such manner as may be equitable in
the circumstances.
4.10 Certain Limitations. Notwithstanding anything herein to the
contrary, the Company agrees not to enter into any transaction which, by reason
of any adjustment hereunder, would cause the Current Warrant Price to be less
than the par value per share of Common Stock.
5. Notices to Warrant Holders.
5.1 Notice of Adjustments. Whenever the number of shares of Common
Stock for which this Warrant is exercisable, or whenever the price at which a
share of such Common Stock may be purchased upon exercise of this Warrant, shall
be adjusted pursuant to Section 4, the Company shall forthwith prepare a
certificate to be executed by the chief financial officer of the Company setting
forth, in reasonable detail, the event requiring the adjustment and the method
by which such adjustment was calculated (including a description of the basis on
which the Board of Directors of the Company determined the fair value of any
evidences of indebtedness, shares of stock, other securities or property or
warrants or other subscription or purchase rights referred to in Section 4.2 or
4.7(a)), specifying the number of shares of Common Stock for which this Warrant
is exercisable and (if such adjustment was made pursuant to Section 4.8 or 4.9)
describing the number and kind of any other shares of stock or Other Property
for which this Warrant is exercisable, and any change in the purchase price or
prices thereof, after giving effect to such adjustment or change. The Company
shall promptly cause a signed copy of such certificate to be delivered to Holder
in accordance with Section 13. The Company shall keep at its chief executive
office copies of all such certificates and cause the same to be available for
inspection at said office during normal business hours by Holder or any
prospective purchaser of a Warrant designated by Holder.
15
<PAGE>
5.2 Notice of Certain Corporate Action. Holder shall be entitled to the
same rights to receive notice of corporate action as any holder of Common Stock.
6. No Impairment.
The Company shall not by any action including, without limitation,
amending its certificate of incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant, but will at all times in
good faith assist in the carrying out of all such terms and in the taking of all
such actions as may be necessary or appropriate to protect the rights of Holder
against impairment. Without limiting the generality of the foregoing, the
Company will (a) not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the amount payable therefor
upon such exercise immediately prior to such increase in par value, (b) take all
such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of Common Stock,
free and clear of any liens, claims, encumbrances and restrictions (other than
as provided herein) upon the exercise of this Warrant, and (c) use its best
efforts to obtain all such authorizations, exemptions or consents from any
public regulatory body having jurisdiction thereof as may be necessary to enable
the Company to perform its obligations under this Warrant.
7. Fully Paid Stock; Taxes. The shares of the Common Stock represented
by each and every certificate for Warrant Shares delivered on the exercise of
this Warrant shall, at the time of such delivery, be validly issued and
outstanding, fully paid and non-assessable, and not subject to any pre-emptive
rights. The Company shall pay all expenses in connection with, and all taxes and
other governmental charges that may be imposed with respect to, the issue or
delivery thereof, unless such tax or charge is imposed by law upon Holder, in
which case such taxes or charges shall be paid by Holder. The Company shall not
be required, however, to pay any tax or other charge imposed in connection with
any transfer involved in the issue of any certificate for shares of Common Stock
issuable upon exercise of this Warrant in any name other than that of Holder,
and in such case the Company shall not be required to issue or deliver any stock
certificate until such tax or other charge has been paid or it has been
established to the satisfaction of the Company that no such tax or other charge
is due.
8. Transfer.
8.1 Securities Laws. Neither this Warrant nor the Warrant Shares
issuable upon the exercise hereof have been registered in reliance on Section
4(2) of the Securities Act or under any state securities laws and unless so
registered may not be transferred, sold, pledged, hypothecated or otherwise
disposed of unless an exemption from registration pursuant to Rule 144 of the
Securities Act is available. Except as provided in Section 8.6, this Warrant
shall bear the following legend:
16
<PAGE>
NEITHER THESE WARRANTS NOR THE SHARES OF COMMON STOCK ISSUABLE UPON
EXERCISE OF THESE WARRANTS HAVE BEEN REGISTERED WITH THE U.S. SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON
AN EXEMPTION FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THESE WARRANTS AND THE SHARES OF
COMMON STOCK ISSUABLE UPON EXERCISE OF THESE WARRANTS ARE RESTRICTED AND MAY NOT
BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE ACT OR PURSUANT TO AN APPLICABLE EXEMPTION THEREFROM.
8.2 Conditions to Transfer. In the event Holder desires to transfer
this Warrant or any of the Warrant Shares issued (in the absence of registration
under the Securities Act), the Holder must give the Company prior written notice
of such proposed transfer including the name and address of the proposed
transferee. Such transfer may be made only either (i) upon publication by the
Commission of a ruling, interpretation, opinion or "no action letter" based upon
facts presented to said Commission, or (ii) upon receipt by the Company of an
opinion of Holder's counsel acceptable to the Company, in either case to the
effect that the proposed transfer will not violate the provisions of the
Securities Act, the Exchange Act, or the rules and regulations promulgated under
either such act (collectively, the "Securities Laws"). Prior to any such
proposed transfer, and as a condition thereto, if such transfer is not made
pursuant to an effective registration statement under the Securities Act, the
Holder will, if requested by the Company, deliver to the Company any
representation or agreement reasonably requested to determine compliance with
the Securities Laws.
8.3 Indemnity. The Holder acknowledges that the Holder understands the
meaning and legal consequences of this Section 8 and the Holder hereby shall
indemnify and hold harmless the Company, its representatives and each officer,
director and control person thereof from and against any and all loss, damage or
liability (including all attorneys' fees and costs incurred in enforcing this
indemnity provision) due to or arising out of (i) any transfer of the Warrant or
any of the Warrant Shares in violation of the Securities Act, the Exchange Act,
or the rules and regulations promulgated under either of such acts, or (ii) any
transfer of the Warrant or any of the Warrant Shares not in accordance with this
Warrant or any of the Warrant Shares not in accordance with this Warrant.
8.4 Transfer. Except as provided in this Section 8, this Warrant and
the Warrant Shares issued may be transferred by the Holder in whole or in part
at any time or from time to time. Upon surrender of this Warrant to the Company
or at the office of its stock transfer agent, if any, with the Assignment Form
annexed hereto duly executed and funds sufficient to pay any transfer tax, and
upon compliance with the foregoing provisions, the Company shall, without
charge, execute and deliver a new Warrant or Warrants in the name of the
assignee or assignees named in such Assignment Form (and if the entire amount of
the Warrant is not being transferred, in the name of the Holder), and this
Warrant shall promptly be canceled. Any assignment, transfer, pledge,
hypothecation or other disposition of this Warrant attempted contrary to the
provisions of this
17
<PAGE>
Warrant, or any levy of execution, attachment or other process attempted upon
the Warrant, shall be null and void and without effect.
8.5 Registration. The Holders of Warrants and Warrant Shares shall have
the right to request registration of such Warrant Shares pursuant to the
Registration Rights Agreement.
8.6 Termination of Restrictions. Notwithstanding the foregoing
provisions of Section 8, the restrictions imposed by this Section upon the
transferability of the Warrants, the War rant Shares and the Restricted Common
Stock (or Common Stock issuable upon the exercise of the Warrants) and the
legend requirements of Section 8.1 shall terminate as to any particular Warrant
or Warrant Share or Restricted Common Stock (or Common Stock issuable upon the
exercise of the Warrants) (i) when and so long as such security shall have been
effectively registered under the Securities Act and disposed of pursuant
thereto, or (ii) when the Company shall have delivered to the Holder or Holders
of Warrants, Warrant Shares or Restricted Common Stock the written opinion of
Independent Counsel stating that such legend is not required in order to ensure
compliance with the Securities Act. Whenever the restrictions imposed by Section
8 shall terminate as to this War rant, as hereinabove provided, the Holder
hereof shall be entitled to receive from the Company, at the expense of the
Company, a new Warrant bearing the following legend in place of the restrictive
legend set forth hereon:
"THE RESTRICTIONS ON TRANSFERABILITY OF THE WITHIN WARRANT
CONTAINED IN SECTION 8 HEREOF TERMINATED ON ____________, 19__, AND
ARE OF NO FURTHER FORCE AND EFFECT."
All Warrants issued upon registration of transfer, division or combination of,
or in substitution for, any Warrant or Warrants entitled to bear such legend
shall have a similar legend endorsed thereon. Whenever the restrictions imposed
by this Section shall terminate as to any share of Restricted Common Stock, as
hereinabove provided, the Holder thereof shall be entitled to receive from the
Company, at the Company's expense, a new certificate representing such Common
Stock not bearing the restrictive legend set forth in Section 8.1.
9. Loss, etc. of Warrant. Upon receipt of evidence satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant, and of
indemnity reasonably satisfactory to the Company (it being understood that the
written indemnity agreement of AJG Financial Services, Inc. shall be sufficient
indemnity), if lost, stolen or destroyed, and upon surrender and cancellation of
this Warrant, if mutilated, the Company shall execute and deliver to the Holder
a new Warrant of like date, tenor, and denomination.
10. Warrant Holder Not Shareholder. Except as otherwise provided here,
this Warrant does not confer upon the Holder any right to vote or to consent to
or receive notice as a shareholder of the Company, as such, in respect of any
matters whatsoever, or any other rights or liabilities as a shareholder of the
Company, either at law or in equity, and the rights of the Holder are limited to
those expressed in this Warrant.
18
<PAGE>
11. Liquidated Damages. In the event the Company fails to comply in all
material respects with any provision of the Registration Rights Agreement, upon
written request of the Holder of this Warrant or Warrant Shares, the Company
shall promptly obtain from an independent investment banking firm acceptable to
such Holder an opinion estimating the net proceeds which such Holder would have
received (after deducting underwriting commissions and discounts and any other
expenses that would have been solely attributable to the registration or
qualification of such shares of Warrant Shares) upon the sale of shares of
Warrant Shares proposed to be sold pursuant to such registration or
qualification. Such opinion of the independent investment banking firm shall be
(a) delivered in writing to the Company, with a copy to such Holder, within
thirty (30) days after the date of the request of such Holder to the Company and
(b) conclusive and binding on the Company and such Holder.
Within 30 days of receipt by the Company of such estimate, the Company
shall pay to such Holder an amount equal to (a) such estimated net proceeds
minus (b) the aggregate Warrant Price paid or payable with respect to such
shares of Warrant Shares. Payment of such amount shall be made by, at the option
of such person, (i) wire transfer to an account in a bank located in the United
States designated by such Holder for such purpose or (ii) a certified or
official bank check drawn on a member of the Chicago or New York Clearing House
payable to the order of such Holder. Upon payment to such Holder of such
liquidated damages, such Holder shall assign to the Company this Warrant and the
Warrant Shares proposed to be sold pursuant to the registration or qualification
in question without any representation or warranty (other than that such Holder
has good and marketable title thereto, free and clear of liens, claims,
encumbrances and restrictions of any kind). If less than all of the shares of
Common Stock issuable upon the exercise hereof were proposed to be sold pursuant
to the registration or qualification in question, the Company shall cancel this
Warrant and issue in the name of, and deliver to, the Holder, pursuant to
Section 2, a new Warrant for the shares of Common Stock issuable upon the
exercise hereof not required to be assigned to the Company pursuant to the
provisions of the preceding sentence. The Company agrees that the amount of
actual damages that would be sustained by such Holder as a result of the failure
of the Company to comply with any provisions of the Registration Rights
Agreement is not capable of ascertainment on any other basis.
12. Appraisal. The determination of the Appraised Value per share of
Common Stock shall be made by an investment banking firm of nationally
recognized standing selected by the Majority Holders and acceptable to the
Company. If the investment banking firm selected by the Majority Holders is not
acceptable to the Company and the Company and the Majority Holders cannot agree
on a mutually acceptable investment banking firm, then the Majority Holders and
the Company shall each choose one such investment banking firm and the
respective chosen firms shall agree on another investment banking firm which
shall make the determination. The Company shall, at its sole cost, pay all fees
of such investment banking firm as may be necessary for the determination of
Appraised Value required by the terms of this Warrant.
13. Communication. No notice or other communication under this Warrant
shall be effective unless the same is in writing and is either (i) mailed by
first-class mail, postage prepaid,
19
<PAGE>
in which event the notice shall be deemed effective three days after deposit in
the mails, or (ii) delivered by established delivery service which guarantees
three business days or less delivery, in which event the notice shall be deemed
effective on the date of guaranteed delivery. Regardless of the method of
delivery, the notice or communication shall be addressed to:
(a) the Company at 3280 North Frontage Road, Lehi, Utah
84043, Attention: Chief Executive Officer or such
other address as the Company has designated in
writing to the Holder, or
(b) the Holder at the address indicated in the opening
paragraph hereof, or such other address as the Holder
has designated in writing to the Company.
14. Headings. The headings of this Warrant have been inserted as a
matter of convenience and shall not affect the construction hereof.
15. Applicable Law. This Warrant shall be governed by and construed in
accordance with the law of the State of Delaware without giving effect to the
principles of conflicts of law thereof.
16. Warrant Register. The Company will register this Warrant in the
Warrant Register in the name of the record holder to whom it has been
distributed or assigned in accordance with the terms hereof. The Company may
deem and treat the registered Holder of this Warrant as the absolute owner
hereof (notwithstanding any notation of ownership or other writing hereon made
by anyone) for the purpose of any exercise hereof or any distribution to the
Holder and for all other purposes, and the Company shall not be affected by any
notice to the contrary.
17. Successors. All of the provisions of this Warrant by or for the
benefit of the Company or the Holder shall bind and inure to the benefit of
their respective successors and assigns.
IN WITNESS WHEREOF, Covol Technologies, Inc. has caused this Warrant to
be signed by its President and its corporate seal to be hereunto affixed and
attested by its Secretary this 9th day of January, 1998.
ATTEST: COVOL TECHNOLOGIES, INC.
/Asael T. Sorensen, Jr./ By: Stanley M. Kimball
- ------------------------- ---------------------
Secretary President
20
<PAGE>
EXERCISE FORM
To be executed by the Holder
in Order to Exercise Warrants
The undersigned Holder hereby irrevocably elects to exercise Warrants
represented by this Warrant, and to purchase the securities issuable upon the
exercise of such Warrants, and requests that certificates for such securities
shall be issued in the Holder's name and be delivered to
[please print or type address]
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant, that a new Warrant for the balance of such Warrants be registered in
the name of, and delivered to, the Holder at the address stated above.
The undersigned acknowledges that, if this Exercise Form is submitted
prior to the Company having given notice that the issuance of the Warrant Shares
has been registered under the Securities Act, the Warrant Shares issued on
exercise will be "restricted securities" and will bear appropriate restrictive
legends.
Dated:
Signature of Holder
Signature Guaranteed
21
<PAGE>
ASSIGNMENT
To Be Executed by the Holder
in Order to Assign Warrants
THE WARRANTS REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER FEDERAL
OR STATE SECURITIES LAWS AND TRANSFER THEREOF HAS BEEN RESTRICTED. ANY TRANSFER
OR PURPORTED TRANSFER DESCRIBED IN THIS FORM OF ASSIGNMENT SHALL NOT BE
EFFECTIVE UNTIL AND UNLESS THE PROPOSED TRANSFEREE COMPLIES WITH THE
RESTRICTIONS ON TRANSFER DESCRIBED IN THE WARRANT CERTIFICATE.
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto
Name:
[please print or type]
Address:
Social Security:
or Taxpayer
I.D. No.
the undersigned's right to purchase up to ___________ Shares of Common Stock
represented by this Warrant, and hereby irrevocably constitutes and appoints
____________________________________ attorney to transfer the same on the books
of the Company, with full power of substitution in the premises.
Dated:
Signature Guaranteed
22
WARRANT B
Dated: January 9, 1998 Warrant No. WA-1997-246
**216,272** Shares
NEITHER THESE WARRANTS NOR THE SHARES OF COMMON STOCK ISSUABLE UPON
EXERCISE OF THESE WARRANTS HAVE BEEN REGISTERED WITH THE U.S. SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON
AN EXEMPTION FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THESE WARRANTS AND THE SHARES OF
COMMON STOCK ISSUABLE UPON EXERCISE OF THESE WARRANTS ARE RESTRICTED AND MAY NOT
BE OFFERED OR SOLD EXCEPT PURSUANT TO REGULATION D UNDER THE ACT, AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT OR PURSUANT TO AN APPLICABLE EXEMPTION
THEREFROM.
These Warrants shall cease to be exercisable and shall be void
after January 10, 2000, at 5:00 p.m.,
Salt Lake City, Utah time.
COMMON STOCK PURCHASE WARRANTS
OF
COVOL TECHNOLOGIES, INC.
FOR VALUE RECEIVED, Covol Technologies, Inc. (the "Company"), a
Delaware corporation, hereby certifies that AJG Financial Services, Inc., or its
permitted assigns, is entitled to purchase from the Company, subject to the
conditions and upon the terms of this Warrant, at any time or from time to time
after the date hereof and prior to 5:00 p.m. Salt Lake City, Utah time, on
January 10, 2000, an aggregate of 216,272 fully paid and nonassessable shares of
Common Stock, par value $.001, of the Company (subject to adjustment as provided
herein), at a per share exercise price of $20.00 per share (subject to
adjustment as provided herein). This Warrant is issued pursuant to the terms set
forth in a letter agreement dated October 22, 1997, by and between the Holder
(as defined below) and the Company (the "Letter Agreement").
1. Definitions.
As used in this Warrant, the following terms have the respective
meanings set forth below:
"Additional Shares of Common Stock" shall mean all shares of Common
Stock issued by the Company after the Closing Date, other than Warrant Shares.
1
<PAGE>
"Affiliate" of any Person shall mean a Person that directly or
indirectly, through one or more intermediaries, controls or is controlled by or
is under common control with, such Person.
"Appraised Value" shall mean, in respect of any share of Common Stock
on any date herein specified, the fair market value of such share of Common
Stock (determined without giving effect to the discount for (i) a minority
interest, or (ii) any lack of liquidity of the Common Stock or to the fact that
the Company may have no class of equity registered under the Exchange Act, based
on the quotient obtained by dividing (x) the value of the Company, as determined
by an investment banking firm selected in accordance with the terms of Section
12, by (y) the number of Fully Diluted Outstanding shares of Common Stock.
"Book Value" shall mean, in respect of any share of Common Stock on any
date herein specified, the consolidated book value of the Company (with
inventory valued on a first-in-first-out basis) applicable to Common Stock as of
the last day of any month immediately preceding such date, divided by the number
of Fully Diluted Outstanding shares of Common Stock as determined in accordance
with GAAP by Price Waterhouse Coopers LLP or any other firm of independent
certified public accountants of recognized national standing selected by the
Company and reasonably acceptable to the Majority Holders, determined in any
event without any adjustment or reduction for the amount, if any, that may,
under modifications to GAAP adopted after the Closing Date, be required either
as an offset to or reserve against earnings or retained earnings, or as a
deduction from book value or net worth, in either event as a result of the
exercise, issuance, anticipated exercise or anticipated cost to the Company of
any stock option, right or convertible security or any provision of the Warrants
or any other warrant issued by the Company.
"Business Day" shall mean any day that is not a Saturday or Sunday or a
day on which banks are required or permitted to be closed in the State of Utah
or the State of Illinois.
"Closing Date" shall mean January 9, 1998.
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency then administering the Securities Act and other federal
securities laws.
"Common Stock" shall mean (except where the context otherwise
indicates) the Common Stock, $0.001 par value, of the Company as constituted on
the Closing Date, and any capital stock into which such Common Stock may
thereafter be changed, and shall also include (i) capital stock of the Company
of any other class (regardless of how denominated) issued to the holders of
shares of Common Stock upon any reclassification thereof which is also not
preferred as to dividends or assets over any other class of stock of the Company
and which is not subject to redemption and (ii) shares of common stock of any
successor or acquiring corporation (as defined in Section 4.8) received by or
distributed to the holders of Common Stock of the Company in the circumstances
contemplated by Section 4.8.
2
<PAGE>
"Convertible Securities" shall mean evidences of indebtedness, shares
of stock or other securities which are convertible into or exchangeable, with or
without payment of additional consideration in cash or property, for Additional
Shares of Common Stock, either immediately or upon the occurrence of a specified
date or a specified event.
"Current Market Price" shall mean, in respect of any share of Common
Stock on any date herein specified, the highest of (a) the Book Value per share
of Common Stock at such date, (b) the Appraised Value per share of Common Stock
as of a date which is within 120 days of such date, (c) the fair market value
thereof as determined in good faith by the Board of Directors of the Company as
of a date which is within 15 days of such date, or (d) if there shall then be a
public market for the Common Stock, the average of the daily market prices for
the 30 consecutive Business Days immediately preceding such date. The daily
market price for each such Business Day shall be (i) the last sale price on such
day on the principal stock exchange on which such Common Stock is then listed or
admitted to trading, (ii) if no sale takes place on such day on any such
exchange, the last reported sale price as officially quoted on any such
exchange, (iii) if the Common Stock is not then listed or admitted to trading on
any stock exchange, the last sale price on such day in the over-the-counter
market, as reported by the National Association of Securities Dealers Automatic
Quotation System ("NASDAQ"), or if such sale price is not available on such
date, the average of the closing bid and asked prices on such date as reported
by NASDAQ, or if not so reported, then as reported by the National Quotation
Bureau, Inc., (iv) if neither such firm at the time is engaged in the business
of reporting such prices, as furnished by any similar firm then engaged in such
business, or (v) if there is no such firm, as furnished by any member of the
NASD selected mutually by the Majority Holders and the Company or, if they
cannot agree upon such selection, as selected by two such members of the NASD,
one of which shall be selected by the Majority Holders and one of which shall be
selected by the Company.
"Current Warrant Price" shall mean, in respect of a share of Common
Stock at any date herein specified, the price at which a share of Common Stock
may be purchased pursuant to this Warrant on such date. On the Closing Date, the
Current Warrant Price is $10.00 per share of Common Stock.
"Debenture Agreement" shall mean the Debenture Agreement and Security
Agreement, dated as of January 9, 1998, between the Company and AJG Financial
Services, Inc.
"Default Rate" means eight percent (8%).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect from time to time.
"Exercise Period" shall mean the period during which this Warrant is
exercisable pursuant to Section 2.
3
<PAGE>
"Fully Diluted Outstanding" shall mean, when used with reference to
Common Stock, at any date as of which the number of shares thereof is to be
determined, all shares of Common Stock Outstanding at such date and all shares
of Common Stock issuable in respect of this Warrant outstanding on such date and
other options or warrants to purchase, or securities convertible into, shares of
common stock outstanding on such date which would be deemed outstanding in
accordance with GAAP for purposes of determining book value or net income per
share.
"GAAP" shall mean generally accepted accounting principles in the
United States of America as from time to time in effect.
"Holder" shall mean, as the context requires, the Person in whose name
this Warrant or one of the other Warrants is registered on the books of the
Company maintained for such purpose or the Person holding any Warrant Shares,
and "Holders" shall mean two or more such Persons.
"Independent Counsel" shall mean counsel to the Company, unless counsel
to Holder disagrees in writing with the opinion or advice of such counsel with
respect to the issue in question within fifteen (15) days after receipt of such
opinion or advice, in which case the Company and Holder shall select another
counsel, not the regular counsel of either, who is experienced in Securities Act
matters, who shall render an opinion with respect to the issue in question. The
legal fees and expenses of such other counsel incurred in connection with the
rendering of such opinion shall be borne equally by Holder and the Company.
"Letter Agreement" shall have the meaning set forth in the first
paragraph of this Warrant.
"Majority Holders" shall mean the Holders of Warrants exercisable for
in excess of 50% of the aggregate number of shares of Common Stock then
purchasable upon exercise of all Warrants, whether or not then exercisable.
"NASD" shall mean the National Association of Securities Dealers, Inc.,
or any successor corporation thereto.
"Other Property" shall have the meaning set forth in Section 4.8.
"Outstanding" shall mean, when used with reference to Common Stock, at
any date as of which the number of shares thereof is to be determined, all
issued shares of Common Stock, except shares then owned or held by or for the
account of the Company or any Subsidiary, and shall include all shares issuable
in respect of outstanding scrip or any certificates representing fractional
interests in shares of Common Stock.
"Permitted Issuances" shall mean [(i) the issuance of up to 800,000
shares of Common Stock pursuant to certain outstanding warrants of the Company
which are "out of the money" as of the Closing Date, (ii) the issuance of up to
1,500,000 shares of Common Stock pursuant to certain outstanding options,
warrants or other securities of the Company convertible into Common Stock
4
<PAGE>
which are "in the money" as of the Closing Date, (iii) the issuance of or
granting of rights to acquire up to 790,000 shares of Common Stock to PacifiCorp
Financial Services, inc. or any of its affiliates ('PacifiCorp"), or their
respective assigns, pursuant to the Convertible Loan and Security Agreement,
dated, between the Company and PacifiCorp, (iv) the issuance of or granting of
rights to acquire up to 515,000 shares of Common Stock to be sold by the Company
pursuant to a private Placement Memorandum, (v) the issuance of or granting of
rights to acquire up to 100,000 shares of Common Stock to LKD Partnership or its
assigns pursuant to a Convertible Debenture in the principal amount of
approximately $1,000,000 issued in November, 1996, (vi) the issuance of or
granting of rights to acquire up to 2,000,000 shares of Common Stock to
officers, directors, consultants or employees of the Company, which rights vest
over the next 8 to 9 years, (vii) the issuance of or granting of rights to
acquire up to 400,000 additional shares of Common Stock to any third parties in
transactions other than those referred to in the preceding clauses (i) through
(vi)], and (viii) the issuance of shares of Common Stock upon exercise of the
Warrants.
"Person" shall mean any individual, sole proprietorship, partnership,
joint venture, trust, incorporated organization, association, corporation,
institution, public benefit corporation, entity or government (whether federal,
state, county, city, municipal or otherwise, including, without limitation, any
instrumentality, division, agency, body or department thereof).
"Registration Rights Agreement" shall mean the Registration Rights
Agreement, dated as of January 9, 1998, between the Company and AJG Financial
Services, Inc.
"Restricted Common Stock" shall mean shares of Common Stock which are,
or which upon their issuance on the exercise of this Warrant would be, evidenced
by a certificate bearing the restrictive legend set forth in Section 8.1.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Subsidiary" shall mean any corporation of which an aggregate of more
than 50% of the outstanding stock having ordinary voting power to elect a
majority of the board of directors of such corporation (irrespective of whether,
at the time, stock of any other class or classes of such corporation shall have
or might have voting power by reason of the happening of any contingency) is at
the time, directly or indirectly, owned legally or beneficially by the Company
and/or one or more Subsidiaries of the Company.
"Termination Date" shall have the meaning set forth in Section 2.
"Transfer" shall mean any disposition of any Warrant or Warrant Shares
or of any interest in either thereof, which would constitute a sale thereof
within the meaning of the Securities Act.
5
<PAGE>
"Warrant Price" shall mean an amount equal to (i) the number of shares
of Common Stock being purchased upon exercise of this Warrant pursuant to
Section 2, multiplied by (ii) the Current Warrant Price as of the date of such
exercise.
"Warrant Shares" shall mean the shares of Common Stock purchased by
Holders of the Warrants upon the exercise thereof.
"Warrants" shall mean the two Warrants (one designated Warrant A and
the other designated Warrant B), each dated January 9, 1998, issued by the
Company to AJG Financial Services, Inc. evidencing rights to purchase initially
up to an aggregate of 432,544 shares of Common Stock, and all warrants issued
upon transfer, division or combination of, or in substitution or exchange for,
any thereof.
2. Exercise of Warrant. This Warrant may be exercised, in whole at any
time or in part from time to time during the period (the "Exercise Period")
commending on the date hereof, and ending on January 10, 2000, at 5:00 p.m. Salt
Lake City, Utah time (the "Termination Date"), by the Holder of this Warrant by
the surrender of this Warrant (with the exercise form at the end hereof duly
executed) at the address set forth in Section 13 hereof, together with payment
of the Warrant Price. Payment of the Warrant Price shall be made first by
offset, in whole or in part, against any obligation of the Company to the Holder
pursuant to the Debenture issued pursuant to the Debenture Agreement, and then
any balance by wire transfer to an account in a bank located in the United
States designated for such purpose by the Company or by certified or official
bank check. The Warrant shall expire, and exercise shall no longer be allowed,
to the extent the Warrant has not been exercised by the expiration of the
Exercise Period.
If this Warrant is exercised in part, this Warrant must be exercised
for a minimum of 1,000 shares of Common Stock and if the Exercise Period has not
expired the Holder is entitled to receive a new Warrant covering the number of
Warrant Shares in respect of which this Warrant has not been exercised and
setting forth the proportionate part of the Warrant Price applicable to such
Warrant Shares. Upon such surrender of this Warrant, the Company will (a) issue
a warrant or warrants in the name of the Holder for the largest number of whole
shares of Common Stock to which the Holder shall be entitled and, if this
Warrant is exercised in whole, in lieu of any fractional share of the Common
Stock to which the Holder shall be entitled, cash equal to the fair value of
such fractional share (determined in such reasonable manner as the Board of
Directors of the Company shall determine), and (b) deliver the proportionate
part thereof if this Warrant is exercised in part, pursuant to the provisions of
this Warrant. The Warrant shall expire, and exercise shall no longer be allowed,
to the extent the Warrant has not been exercised by the expiration of the
Exercise Period.
3. Reservation of Warrant Shares. The Company will at all times during
the Exercise Period have authorized and reserved, and will keep available,
solely for issuance or delivery upon the exercise of this Warrant, the Warrant
Shares. All shares of Common Stock which shall be so issuable, when issued upon
exercise of any Warrant and payment therefor in accordance with the terms of
such Warrant, shall be duly and validly issued, fully paid and nonassessable and
free and
6
<PAGE>
clear of any liens, claims and restrictions (other than as provided herein). No
stockholder of the Company has or shall have any preemptive rights to subscribe
for such shares of Common Stock.
Before taking any action which would cause an adjustment reducing the
Current Warrant Price below the then par value, if any, of the shares of Common
Stock issuable upon exercise of the Warrants, the Company shall take any
corporate action which may be necessary in order that the Company may validly
and legally issue fully paid and nonassessable shares of such Common Stock at
such adjusted Current Warrant Price.
Before taking any action which would result in an adjustment in the
number of shares of Common Stock for which this Warrant is exercisable or in the
Current Warrant Price, the Company shall obtain all such authorizations or
exemptions thereof, or consents thereto, as may be necessary from any public
regulatory body or bodies having jurisdiction thereof.
If any shares of Common Stock required to be reserved for issuance upon
exercise of Warrants require registration or qualification with any governmental
authority under any federal or state law (otherwise than as provided in Section
8) before such shares may be so issued, the Company will in good faith and as
expeditiously as possible and at its expense endeavor to cause such shares to be
duly registered.
4. Adjustments.
The number of shares of Common Stock for which this Warrant is
exercisable, or the price at which such shares may be purchased upon exercise of
this Warrant, shall be subject to adjustment from time to time as set forth in
this Section 4. The Company shall give Holder notice of any event described
below which requires an adjustment pursuant to this Section 4 at the time of
such event.
4.1 Stock Dividends, Subdivisions and Combinations. If at any time the
Company shall:
(a) take a record of the holders of its Common Stock for
the purpose of entitling them to receive a dividend
payable in, or other distribution of, Additional
Shares of Common Stock,
(b) subdivide its outstanding shares of Common Stock into
a larger number of shares of Common Stock, or
(c) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock,
then (i) the number of shares of Common Stock for which this Warrant is
exercisable immediately after the occurrence of any such event shall be adjusted
to equal the number of shares of Common Stock which a record holder of the same
number of shares of Common Stock for which this Warrant
7
<PAGE>
is exercisable immediately prior to the occurrence of such event would own or be
entitled to receive after the happening of such event, and (ii) the Current
Warrant Price shall be adjusted to equal (a) the Current Warrant Price
multiplied by the number of shares of Common Stock for which this Warrant is
exercisable immediately prior to the adjustment divided by (b) the number of
shares for which this Warrant is exercisable immediately after such adjustment.
4.2 Certain Other Distributions. If at any time the Company shall take
a record of the holders of its Common Stock for the purpose of entitling them to
receive any dividend or other distribution of:
(a) cash;
(b) any evidences of its indebtedness, any shares of its
stock or any other securities or property of any
nature whatsoever (other than cash, Convertible
Securities or Additional Shares of Common Stock); or
(c) any warrants or other rights to subscribe for or
purchase any evidences of its indebtedness, any
shares of its stock or any other securities or
property of any nature whatsoever (other than cash,
Convertible Securities or Additional Shares of Common
Stock);
then (i) the number of shares of Common Stock for which this Warrant is
exercisable shall be adjusted to equal the product obtained by multiplying the
number of shares of Common Stock for which this Warrant is exercisable
immediately prior to such adjustment by a fraction (a) the numerator of which
shall be the Current Market Price per share of Common Stock at the date of
taking such record and (b) the denominator of which shall be such Current Market
Price per share of Common Stock, minus the amount allocable to one share of
Common Stock of (x) any such cash so distributable and (y) the fair value (as
determined in good faith by the Board of Directors of the Company and supported
by an opinion from an investment banking firm of recognized national standing
acceptable to the Majority Holders) of any and all such evidences of
indebtedness, shares of stock, other securities or property or warrants or other
subscription or purchase rights so distributable, and (ii) the Current Warrant
Price shall be adjusted to equal (a) the Current Warrant Price multiplied by the
number of shares of Common Stock for which this Warrant is exercisable
immediately prior to the adjustment divided by (b) the number of shares for
which this Warrant is exercisable immediately after such adjustment. A
reclassification of the Common Stock (other than a change in par value, or from
par value to no par value or from no par value to par value) into shares of
Common Stock and shares of any other class of stock shall be deemed a
distribution by the Company to the holders of its Common Stock of such shares of
such other class of stock within the meaning of this Section 4.2 and, if the
outstanding shares of Common Stock shall be changed into a larger or smaller
number of shares of Common Stock as a part of such reclassification, such change
shall be deemed a subdivision or combination, as the case may be, of the
outstanding shares of Common Stock within the meaning of Section 4.1.
8
<PAGE>
4.3 Issuance of Additional Shares of Common Stock.
(a) If at any time the Company shall (except as
hereinafter provided in Sections 4.4 and 4.5) issue
or sell any Additional Shares of Common Stock, other
than Permitted Issuances, for consideration in an
amount per Additional Share of Common Stock less than
the greater of the Current Warrant Price or the
Current Market Price, then: (i) the number of shares
of Common Stock for which this Warrant is exercisable
shall be adjusted to equal the product obtained by
multiplying the number of shares of Common Stock for
which this Warrant is exercisable immediately prior
to such issue or sale by a fraction (W) the numerator
of which is the number of shares of Common Stock
Outstanding immediately after the issuance or sale of
such Additional Shares of Common Stock, and (X) the
denominator of which is number of shares of Common
Stock Outstanding immediately prior to such issuance
or sale; and (ii) the Current Warrant Price shall be
adjusted to a price determined by dividing (a) an
amount equal to the sum of (X) the number of shares
of Common Stock Outstanding immediately prior to such
issuance or sale multiplied by the then existing
Current Warrant Price, plus (Y) the consideration, if
any, received by the Company upon such issuance or
sale, by (b) the total number of shares of Common
Stock Outstanding immediately after such issuance or
sale.
(b) If at any time the Company shall (except as
hereinafter provided in Sections 4.4 and 4.5) issue
or sell any Additional Shares of Common Stock, other
than Permitted Issuances, for consideration in an
amount per Additional Share of Common Stock equal to
or greater than the greater of the Current Warrant
Price or the Current Market Price, then the number of
shares for which this Warrant is exercisable shall
not change, but the Company shall issue to Holder a
new Warrant for the number of shares of Common Stock
equal to (i) the product obtained by multiplying the
number of shares of Common Stock for which this
Warrant is exercisable immediately prior to such
issuance or sale by a fraction (W) the numerator of
which is the number of shares of Common Stock
Outstanding immediately after the issuance or sale of
such Additional Shares of Common Stock, and (X) the
denominator of which is the number of shares of
Common Stock Outstanding immediately prior to such
issuance or sale, less (ii) the number of shares for
which this Warrant is exercisable immediately prior
to such issuance or sale. The new Warrant shall have
the same terms and provisions as this Warrant except
with respect to the number of shares for which it is
exercisable and except that the Current Warrant Price
(as defined in the new Warrant) for each share of
Common Stock for which such new Warrant is
exercisable shall be equal to the fair value of the
consideration per Additional Share of Common Stock.
9
<PAGE>
(c) The provisions of this Section 4.3 shall not apply to
any issuance of Additional Shares of Common Stock for
which an adjustment is provided under Section 4.1 or
4.2. No adjustment shall be made under this Section
4.3 upon the issuance of any Additional Shares of
Common Stock which are issued pursuant to the
exercise of any warrants or other subscription or
purchase rights or pursuant to the exercise of any
conversion or exchange rights in any Convertible
Securities, if any such adjustment shall previously
have been made upon the issuance of such warrants or
other rights or upon the issuance of such Convertible
Securities (or upon the issuance of any warrant or
other rights therefor) pursuant to Section 4.4 or
Section 4.5.
4.4 Issuance of Warrants or Other Rights. If at any time the Company
shall take a record of the holders of its Common Stock for the purpose of
entitling them to receive a distribution of, or shall in any manner (whether
directly or by assumption in a merger in which the Company is the surviving
corporation) issue or sell, any warrants (other than the Warrants) or other
rights to subscribe for or purchase any Additional Shares of Common Stock or any
Convertible Securities, whether or not the rights to exchange or convert
thereunder are immediately exercisable, and the price per share for which Common
Stock is issuable upon the exercise of such warrants or other rights or upon
conversion or exchange of such Convertible Securities shall be less than the
greater of the Current Warrant Price or the Current Market Price in effect
immediately prior to the time of such distribution, issue or sale, then the
number of shares of Common Stock for which this Warrant is exercisable and the
Current Warrant Price shall be adjusted as provided in Section 4.3(a) on the
basis that (i) the maximum number of Additional Shares of Common Stock issuable
pursuant to all such warrants or other rights or necessary to effect the
conversion or exchange of all such Convertible Securities shall be deemed to
have been issued and outstanding, (ii) the price per share for such Additional
Shares of Common Stock shall be deemed to be the lowest price per share at which
such Additional Shares of Common Stock are available to such holders, and (iii)
the Company shall have received all of the consideration, if any, payable for
such warrants or other rights as of the date of the actual issuance thereof. No
further adjustments of the number of shares of Common Stock for which this
Warrant is exercisable or of the Current Warrant Price shall be made upon the
actual issue of such Common Stock or of such Convertible Securities upon
exercise of such warrants or other rights or upon the actual issue of such
Common Stock upon such conversion or exchange of such Convertible Securities.
4.5 Issuance of Convertible Securities. If at any time the Company
shall take a record of the holders of its Common Stock for the purpose of
entitling them to receive a distribution of, or shall in any manner (whether
directly or by assumption in a merger in which the Company is the surviving
corporation) issue or sell, any Convertible Securities, whether or not the
rights to exchange or convert thereunder are immediately exercisable, and the
price per share for which Common Stock is issuable upon such conversion or
exchange shall be less than the greater of the Current Warrant Price or the
Current Market Price in effect immediately prior to the time of such issue or
sale, then the number of shares of Common Stock for which this Warrant is
exercisable and the Current Warrant Price shall be adjusted as provided in
Section 4.3(a) on the basis that (i) the maximum
10
<PAGE>
number of Additional Shares of Common Stock issuable upon the conversion or
exchange of all such Convertible Securities shall be deemed to have been issued
and outstanding, (ii) the price per share of such Additional Shares of Common
Stock shall be deemed to be the lowest possible price in any range of prices at
which such Additional Shares of Common Stock are available to such holders, and
(iii) the Company shall have received all of the consideration payable therefor,
if any, as of the date of actual issuance of such Convertible Securities. No
further adjustment of the number of shares of Common Stock for which this
Warrant is exercisable or of the Current Warrant Price shall be made under this
Section 4.5 upon the issuance of any Convertible Securities which are issued
pursuant to the exercise of any warrants or other subscription or purchase
rights therefor, if any such adjustment shall previously have been made upon the
issuance of such warrants or other rights pursuant to Section 4.4. No further
adjustments of the number of shares of Common Stock for which this Warrant is
exercisable or of the Current Warrant Price shall be made upon the actual issue
of such Common Stock upon conversion or exchange of such Convertible Securities
and, if any issue or sale of such Convertible Securities is made upon exercise
of any warrant or other right to subscribe for or to purchase or any warrant or
other right to purchase any such Convertible Securities for which adjustments
thereof have been or are to be made pursuant to other provisions of this Section
4, no further adjustments shall be made by reason of such issue or sale.
4.6 Superseding Adjustment. If, at any time after any adjustment of the
number of shares of Common Stock for which this Warrant is exercisable shall
have been made pursuant to Section 4.4 or Section 4.5 as the result of any
issuance of warrants, rights or Convertible Securities, and either
(a) such warrants or rights, or the right of conversion
or exchange in such other Convertible Securities,
shall expire, and all or a portion of such warrants
or rights, or the right of conversion or exchange
with respect to all or a portion of such other
Convertible Securities, as the case may be, shall not
have been exercised, or
(b) the consideration per share for which shares of
Common Stock are issuable pursuant to such warrants
or rights, or the terms of such other Convertible
Securities, shall be increased solely by virtue of
provisions therein contained for an automatic
increase in such consideration per share upon the
occurrence of a specified date or event,
then such previous adjustment shall be rescinded and annulled and the Additional
Shares of Common Stock which were deemed to have been issued by virtue of the
computation made in connection with the adjustment so rescinded and annulled
shall no longer be deemed to have been issued by virtue of such computation.
Thereupon, a recomputation shall be made of the effect of such rights or options
or other Convertible Securities on the then outstanding Warrants, but not on any
then outstanding Warrant Shares, on the basis of
11
<PAGE>
(c) treating the number of Additional Shares of Common
Stock or other property, if any, theretofore actually
issued or issuable pursuant to the previous exercise
of any such warrants or rights or any such right of
conversion or exchange, as having been issued on the
date or dates of any such exercise and for the
consideration actually received and receivable
therefor, and
(d) treating any such warrants or rights or any such
other Convertible Securities which then remain
outstanding as having been granted or issued
immediately after the time of such increase of the
consideration per share for which shares of Common
Stock or other property are issuable under such
warrants or rights or other Convertible Securities.
4.7 Other Provisions Applicable to Adjustments under this Section. The
following provisions shall be applicable to the making of adjustments provided
for in this Section 4:
(a) Computation of Consideration. To the extent that any
Additional Shares of Common Stock or any Convertible
Securities or any warrants or other rights to
subscribe for or purchase any Additional Shares of
Common Stock or any Convertible Securities shall be
issued for cash consideration, the consideration
received by the Company therefor shall be the amount
of the cash received by the Company therefor, or, if
such Additional Shares of Common Stock or Convertible
Securities are offered by the Company for
subscription, the subscription price, or, if such
Additional Shares of Common Stock or Convertible
Securities are sold to underwriters or dealers for
public offering without a subscription offering, the
initial public offering price (in any such case
subtracting any amounts paid or receivable for
accrued interest or accrued dividends, but not
subtracting any compensation, discounts or expenses
paid or incurred by the Company for and in the
underwriting of, or otherwise in connection with, the
issuance thereof). To the extent that such issuance
shall be for a consideration other than cash, then,
except as herein otherwise expressly provided, the
amount of such consideration shall be deemed to be
the fair value of such consideration at the time of
such issuance as determined in good faith by the
Board of Directors of the Company. In case any
Additional Shares of Common Stock or any Convertible
Securities or any warrants or other rights to
subscribe for or purchase such Additional Shares of
Common Stock or Convertible Securities shall be
issued in connection with any merger in which the
Company issues any securities, the amount of
consideration therefor shall be deemed to be the fair
value, as determined in good faith by the Board of
Directors of the Company, of such portion of the
assets and business of the nonsurviving corporation
as such Board in good faith shall determine to be
attributable to such Additional Shares of Common
Stock, Convertible Securities, warrants or other
rights, as the case may be. The consideration for any
Additional Shares of Common
12
<PAGE>
Stock issuable pursuant to any warrants or other
rights to subscribe for or purchase the same shall be
the consideration received by the Company for issuing
such warrants or other rights plus the additional
consideration payable to the Company upon exercise of
such warrants or other rights. The consideration for
any Additional Shares of Common Stock issuable
pursuant to the terms of any Convertible Securities
shall be the consideration, if any, received by the
Company for issuing warrants or other rights to
subscribe for or purchase such Convertible
Securities, plus the consideration paid or payable to
the Company in respect of the subscription for or
purchase of such Convertible Securities, plus the
additional consideration, if any, payable to the
Company upon the exercise of the right of conversion
or exchange in such Convertible Securities. In case
of the issuance at any time of any Additional Shares
of Common Stock or Convertible Securities in payment
or satisfaction of any dividends upon any class of
stock other than Common Stock, the Company shall be
deemed to have received for such Additional Shares of
Common Stock or Convertible Securities a
consideration equal to the amount of such dividend so
paid or satisfied.
(b) When Adjustments to Be Made. The adjustments required
by this Section 4 shall be made whenever and as often
as any specified event requiring an adjustment shall
occur, except that any adjustment of the number of
shares of Common Stock for which this Warrant is
exercisable that would otherwise be required may be
postponed (except in the case of a subdivision or
combination of shares of the Common Stock, as
provided for in Section 4.1) up to, but not beyond
the date of exercise if such adjustment either by
itself or with other adjustments not previously made
adds or subtracts less than 1% of the shares of
Common Stock for which this Warrant is exercisable
immediately prior to the making of such adjustment.
Any adjustment representing a change of less than
such minimum amount (except as aforesaid) which is
postponed shall be carried forward and made upon the
earlier of (i) the date upon which such adjustment,
together with other adjustments required by this
Section 4 and not previously made, would result in a
minimum adjustment, and (ii) the date of exercise.
For the purpose of any adjustment, any specified
event shall be deemed to have occurred at the close
of business on the date of its occurrence.
(c) Fractional Interests. In computing adjustments under
this Section 4, fractional interests in Common Stock
shall be taken into account to the nearest 1/10th of
a share.
(d) When Adjustment Not Required. If the Company shall
take a record of the holders of its Common Stock for
the purpose of entitling them to receive a dividend
or distribution or subscription or purchase rights
and shall,
13
<PAGE>
thereafter and before the distribution to
stockholders thereof, legally abandon its plan to pay
or deliver such dividend, distribution, subscription
or purchase rights, then thereafter no adjustment
shall be required by reason of the taking of such
record and any such adjustment previously made in
respect thereof shall be rescinded and annulled.
(e) Escrow of Warrant Shares. If after any property
becomes distributable pursuant to this Section 4 by
reason of the taking of any record of the holders of
Common Stock, but prior to the occurrence of the
event for which such record is taken, Holder
exercises this Warrant, any Additional Shares of
Common Stock issuable and other property
distributable upon exercise by reason of such
adjustment shall be held in escrow for Holder by the
Company to be issued to Holder upon and to the extent
that the event actually takes place, upon payment of
the then Current Warrant Price. Notwithstanding any
other provision to the contrary herein, if the event
for which such record was taken fails to occur or is
rescinded, then such escrowed shares shall be
canceled by the Company and escrowed property
returned.
(f) Challenge to Good Faith Determination. Whenever the
Board of Directors of the Company shall be required
to make a determination in good faith of the fair
value of any item under this Section 4, such
determination may be challenged in good faith by
Holder, and any dispute shall be resolved by an
investment banking firm of recognized national
standing selected by the Company and acceptable to
such Holder.
4.8 Reorganization, Reclassification, Merger, Consolidation or
Disposition of Assets. In case the Company shall reorganize its capital,
reclassify its capital stock, consolidate or merge with or into another
corporation (where the Company is not the surviving corporation or where there
is a change in or distribution with respect to the Common Stock of the Company),
or sell, transfer or otherwise dispose of all or substantially all its property,
assets or business to another corporation (hereinafter, a "Reorganization") and,
pursuant to the terms of such Reorganization, shares of common stock of the
successor or acquiring corporation, or any cash, shares of stock or other
securities or property of any nature whatsoever (including warrants or other
subscription or purchase rights) in addition to or in lieu of common stock of
the successor or acquiring corporation ("Other Property"), are to be received by
or distributed to the holders of Common Stock of the Company, then each Holder
shall have the right following the effectiveness of such Reorganization to
receive, upon exercise of such Warrant, the number of shares of common stock of
the successor or acquiring corporation or of the Company, if it is the surviving
corporation, and Other Property receivable upon or as a result of such
Reorganization by a holder of the number of shares of Common Stock for which
this Warrant is exercisable immediately prior to such event. In case of any such
Reorganization, the successor or acquiring corporation (if other than the
Company) shall expressly assume the due and punctual observance and performance
of each and every covenant and condition of this Warrant to be performed and
observed by the Company and all the obligations and liabilities
14
<PAGE>
hereunder, subject to such appropriate modifications as are satisfactory to the
Majority Holders in order to provide for adjustments of shares of the Common
Stock for which this Warrant is exercisable which shall be as nearly equivalent
as practicable to the adjustments provided for in this Section 4. For purposes
of this Section 4.8 "common stock of the successor or acquiring corporation"
shall include stock of such corporation of any class which is not preferred as
to dividends or assets over any other class of stock of such corporation and
which is not subject to redemption and shall also include any evidences of
indebtedness, shares of stock or other securities which are convertible into or
exchangeable for any such stock, either immediately or upon the arrival of a
specified date or the happening of a specified event and any warrants or other
rights to subscribe for or purchase any such stock. The foregoing provisions of
this Section 4.8 shall similarly apply to successive Reorganizations.
4.9 Other Action Affecting Common Stock. In case at any time or from
time to time the Company shall take any action in respect of its Common Stock,
other than the payment of dividends permitted by Section 4.2(a) or any other
action described in this Section 4, then, unless such action will not have a
materially adverse effect upon the rights of the Holders, the number of shares
of Common Stock or other stock for which this Warrant is exercisable and/or the
purchase price thereof shall be adjusted in such manner as may be equitable in
the circumstances.
4.10 Certain Limitations. Notwithstanding anything herein to the
contrary, the Company agrees not to enter into any transaction which, by reason
of any adjustment hereunder, would cause the Current Warrant Price to be less
than the par value per share of Common Stock.
5. Notices to Warrant Holders.
5.1 Notice of Adjustments. Whenever the number of shares of Common
Stock for which this Warrant is exercisable, or whenever the price at which a
share of such Common Stock may be purchased upon exercise of this Warrant, shall
be adjusted pursuant to Section 4, the Company shall forthwith prepare a
certificate to be executed by the chief financial officer of the Company setting
forth, in reasonable detail, the event requiring the adjustment and the method
by which such adjustment was calculated (including a description of the basis on
which the Board of Directors of the Company determined the fair value of any
evidences of indebtedness, shares of stock, other securities or property or
warrants or other subscription or purchase rights referred to in Section 4.2 or
4.7(a)), specifying the number of shares of Common Stock for which this Warrant
is exercisable and (if such adjustment was made pursuant to Section 4.8 or 4.9)
describing the number and kind of any other shares of stock or Other Property
for which this Warrant is exercisable, and any change in the purchase price or
prices thereof, after giving effect to such adjustment or change. The Company
shall promptly cause a signed copy of such certificate to be delivered to Holder
in accordance with Section 13. The Company shall keep at its chief executive
office copies of all such certificates and cause the same to be available for
inspection at said office during normal business hours by Holder or any
prospective purchaser of a Warrant designated by Holder.
15
<PAGE>
5.2 Notice of Certain Corporate Action. Holder shall be entitled to the
same rights to receive notice of corporate action as any holder of Common Stock.
6. No Impairment.
The Company shall not by any action including, without limitation,
amending its certificate of incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant, but will at all times in
good faith assist in the carrying out of all such terms and in the taking of all
such actions as may be necessary or appropriate to protect the rights of Holder
against impairment. Without limiting the generality of the foregoing, the
Company will (a) not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the amount payable therefor
upon such exercise immediately prior to such increase in par value, (b) take all
such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of Common Stock,
free and clear of any liens, claims, encumbrances and restrictions (other than
as provided herein) upon the exercise of this Warrant, and (c) use its best
efforts to obtain all such authorizations, exemptions or consents from any
public regulatory body having jurisdiction thereof as may be necessary to enable
the Company to perform its obligations under this Warrant.
7. Fully Paid Stock; Taxes. The shares of the Common Stock represented
by each and every certificate for Warrant Shares delivered on the exercise of
this Warrant shall, at the time of such delivery, be validly issued and
outstanding, fully paid and non-assessable, and not subject to any pre-emptive
rights. The Company shall pay all expenses in connection with, and all taxes and
other governmental charges that may be imposed with respect to, the issue or
delivery thereof, unless such tax or charge is imposed by law upon Holder, in
which case such taxes or charges shall be paid by Holder. The Company shall not
be required, however, to pay any tax or other charge imposed in connection with
any transfer involved in the issue of any certificate for shares of Common Stock
issuable upon exercise of this Warrant in any name other than that of Holder,
and in such case the Company shall not be required to issue or deliver any stock
certificate until such tax or other charge has been paid or it has been
established to the satisfaction of the Company that no such tax or other charge
is due.
8. Transfer.
8.1 Securities Laws. Neither this Warrant nor the Warrant Shares
issuable upon the exercise hereof have been registered in reliance on Section
4(2) of the Securities Act or under any state securities laws and unless so
registered may not be transferred, sold, pledged, hypothecated or otherwise
disposed of unless an exemption from registration pursuant to Rule 144 of the
Securities Act is available. Except as provided in Section 8.6, this Warrant
shall bear the following legend:
16
<PAGE>
NEITHER THESE WARRANTS NOR THE SHARES OF COMMON STOCK ISSUABLE UPON
EXERCISE OF THESE WARRANTS HAVE BEEN REGISTERED WITH THE U.S. SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON
AN EXEMPTION FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THESE WARRANTS AND THE SHARES OF
COMMON STOCK ISSUABLE UPON EXERCISE OF THESE WARRANTS ARE RESTRICTED AND MAY NOT
BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE ACT OR PURSUANT TO AN APPLICABLE EXEMPTION THEREFROM.
8.2 Conditions to Transfer. In the event Holder desires to transfer
this Warrant or any of the Warrant Shares issued (in the absence of registration
under the Securities Act), the Holder must give the Company prior written notice
of such proposed transfer including the name and address of the proposed
transferee. Such transfer may be made only either (i) upon publication by the
Commission of a ruling, interpretation, opinion or "no action letter" based upon
facts presented to said Commission, or (ii) upon receipt by the Company of an
opinion of Holder's counsel acceptable to the Company, in either case to the
effect that the proposed transfer will not violate the provisions of the
Securities Act, the Exchange Act, or the rules and regulations promulgated under
either such act (collectively, the "Securities Laws"). Prior to any such
proposed transfer, and as a condition thereto, if such transfer is not made
pursuant to an effective registration statement under the Securities Act, the
Holder will, if requested by the Company, deliver to the Company any
representation or agreement reasonably requested to determine compliance with
the Securities Laws.
8.3 Indemnity. The Holder acknowledges that the Holder understands the
meaning and legal consequences of this Section 8 and the Holder hereby shall
indemnify and hold harmless the Company, its representatives and each officer,
director and control person thereof from and against any and all loss, damage or
liability (including all attorneys' fees and costs incurred in enforcing this
indemnity provision) due to or arising out of (i) any transfer of the Warrant or
any of the Warrant Shares in violation of the Securities Act, the Exchange Act,
or the rules and regulations promulgated under either of such acts, or (ii) any
transfer of the Warrant or any of the Warrant Shares not in accordance with this
Warrant or any of the Warrant Shares not in accordance with this Warrant.
8.4 Transfer. Except as provided in this Section 8, this Warrant and
the Warrant Shares issued may be transferred by the Holder in whole or in part
at any time or from time to time. Upon surrender of this Warrant to the Company
or at the office of its stock transfer agent, if any, with the Assignment Form
annexed hereto duly executed and funds sufficient to pay any transfer tax, and
upon compliance with the foregoing provisions, the Company shall, without
charge, execute and deliver a new Warrant or Warrants in the name of the
assignee or assignees named in such Assignment Form (and if the entire amount of
the Warrant is not being transferred, in the name of the Holder), and this
Warrant shall promptly be canceled. Any assignment, transfer, pledge,
hypothecation or other disposition of this Warrant attempted contrary to the
provisions of this
17
<PAGE>
Warrant, or any levy of execution, attachment or other process attempted upon
the Warrant, shall be null and void and without effect.
8.5 Registration. The Holders of Warrants and Warrant Shares shall have
the right to request registration of such Warrant Shares pursuant to the
Registration Rights Agreement.
8.6 Termination of Restrictions. Notwithstanding the foregoing
provisions of Section 8, the restrictions imposed by this Section upon the
transferability of the Warrants, the War rant Shares and the Restricted Common
Stock (or Common Stock issuable upon the exercise of the Warrants) and the
legend requirements of Section 8.1 shall terminate as to any particular Warrant
or Warrant Share or Restricted Common Stock (or Common Stock issuable upon the
exercise of the Warrants) (i) when and so long as such security shall have been
effectively registered under the Securities Act and disposed of pursuant
thereto, or (ii) when the Company shall have delivered to the Holder or Holders
of Warrants, Warrant Shares or Restricted Common Stock the written opinion of
Independent Counsel stating that such legend is not required in order to ensure
compliance with the Securities Act. Whenever the restrictions imposed by Section
8 shall terminate as to this War rant, as hereinabove provided, the Holder
hereof shall be entitled to receive from the Company, at the expense of the
Company, a new Warrant bearing the following legend in place of the restrictive
legend set forth hereon:
"THE RESTRICTIONS ON TRANSFERABILITY OF THE WITHIN WARRANT
CONTAINED IN SECTION 8 HEREOF TERMINATED ON ____________, 19__, AND
ARE OF NO FURTHER FORCE AND EFFECT."
All Warrants issued upon registration of transfer, division or combination of,
or in substitution for, any Warrant or Warrants entitled to bear such legend
shall have a similar legend endorsed thereon. Whenever the restrictions imposed
by this Section shall terminate as to any share of Restricted Common Stock, as
hereinabove provided, the Holder thereof shall be entitled to receive from the
Company, at the Company's expense, a new certificate representing such Common
Stock not bearing the restrictive legend set forth in Section 8.1.
9. Loss, etc. of Warrant. Upon receipt of evidence satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant, and of
indemnity reasonably satisfactory to the Company (it being understood that the
written indemnity agreement of AJG Financial Services, Inc. shall be sufficient
indemnity), if lost, stolen or destroyed, and upon surrender and cancellation of
this Warrant, if mutilated, the Company shall execute and deliver to the Holder
a new Warrant of like date, tenor, and denomination.
10. Warrant Holder Not Shareholder. Except as otherwise provided here,
this Warrant does not confer upon the Holder any right to vote or to consent to
or receive notice as a shareholder of the Company, as such, in respect of any
matters whatsoever, or any other rights or liabilities as a shareholder of the
Company, either at law or in equity, and the rights of the Holder are limited to
those expressed in this Warrant.
18
<PAGE>
11. Liquidated Damages. In the event the Company fails to comply in all
material respects with any provision of the Registration Rights Agreement, upon
written request of the Holder of this Warrant or Warrant Shares, the Company
shall promptly obtain from an independent investment banking firm acceptable to
such Holder an opinion estimating the net proceeds which such Holder would have
received (after deducting underwriting commissions and discounts and any other
expenses that would have been solely attributable to the registration or
qualification of such shares of Warrant Shares) upon the sale of shares of
Warrant Shares proposed to be sold pursuant to such registration or
qualification. Such opinion of the independent investment banking firm shall be
(a) delivered in writing to the Company, with a copy to such Holder, within
thirty (30) days after the date of the request of such Holder to the Company and
(b) conclusive and binding on the Company and such Holder.
Within 30 days of receipt by the Company of such estimate, the Company
shall pay to such Holder an amount equal to (a) such estimated net proceeds
minus (b) the aggregate Warrant Price paid or payable with respect to such
shares of Warrant Shares. Payment of such amount shall be made by, at the option
of such person, (i) wire transfer to an account in a bank located in the United
States designated by such Holder for such purpose or (ii) a certified or
official bank check drawn on a member of the Chicago or New York Clearing House
payable to the order of such Holder. Upon payment to such Holder of such
liquidated damages, such Holder shall assign to the Company this Warrant and the
Warrant Shares proposed to be sold pursuant to the registration or qualification
in question without any representation or warranty (other than that such Holder
has good and marketable title thereto, free and clear of liens, claims,
encumbrances and restrictions of any kind). If less than all of the shares of
Common Stock issuable upon the exercise hereof were proposed to be sold pursuant
to the registration or qualification in question, the Company shall cancel this
Warrant and issue in the name of, and deliver to, the Holder, pursuant to
Section 2, a new Warrant for the shares of Common Stock issuable upon the
exercise hereof not required to be assigned to the Company pursuant to the
provisions of the preceding sentence. The Company agrees that the amount of
actual damages that would be sustained by such Holder as a result of the failure
of the Company to comply with any provisions of the Registration Rights
Agreement is not capable of ascertainment on any other basis.
12. Appraisal. The determination of the Appraised Value per share of
Common Stock shall be made by an investment banking firm of nationally
recognized standing selected by the Majority Holders and acceptable to the
Company. If the investment banking firm selected by the Majority Holders is not
acceptable to the Company and the Company and the Majority Holders cannot agree
on a mutually acceptable investment banking firm, then the Majority Holders and
the Company shall each choose one such investment banking firm and the
respective chosen firms shall agree on another investment banking firm which
shall make the determination. The Company shall, at its sole cost, pay all fees
of such investment banking firm as may be necessary for the determination of
Appraised Value required by the terms of this Warrant.
13. Communication. No notice or other communication under this Warrant
shall be effective unless the same is in writing and is either (i) mailed by
first-class mail, postage prepaid,
19
<PAGE>
in which event the notice shall be deemed effective three days after deposit in
the mails, or (ii) delivered by established delivery service which guarantees
three business days or less delivery, in which event the notice shall be deemed
effective on the date of guaranteed delivery. Regardless of the method of
delivery, the notice or communication shall be addressed to:
(a) the Company at 3280 North Frontage Road, Lehi, Utah
84043, Attention: Chief Executive Officer or such
other address as the Company has designated in
writing to the Holder, or
(b) the Holder at the address indicated in the opening
paragraph hereof, or such other address as the Holder
has designated in writing to the Company.
14. Headings. The headings of this Warrant have been inserted as a
matter of convenience and shall not affect the construction hereof.
15. Applicable Law. This Warrant shall be governed by and construed in
accordance with the law of the State of Delaware without giving effect to the
principles of conflicts of law thereof.
16. Warrant Register. The Company will register this Warrant in the
Warrant Register in the name of the record holder to whom it has been
distributed or assigned in accordance with the terms hereof. The Company may
deem and treat the registered Holder of this Warrant as the absolute owner
hereof (notwithstanding any notation of ownership or other writing hereon made
by anyone) for the purpose of any exercise hereof or any distribution to the
Holder and for all other purposes, and the Company shall not be affected by any
notice to the contrary.
17. Successors. All of the provisions of this Warrant by or for the
benefit of the Company or the Holder shall bind and inure to the benefit of
their respective successors and assigns.
IN WITNESS WHEREOF, Covol Technologies, Inc. has caused this Warrant to
be signed by its President and its corporate seal to be hereunto affixed and
attested by its Secretary this 9th day of January, 1998.
ATTEST: COVOL TECHNOLOGIES, INC.
/Asael T. Sorensen, Jr./ By: /Stanley M. Kimball/
- ------------------------ ----------------------
Secretary President
20
<PAGE>
EXERCISE FORM
To be executed by the Holder
in Order to Exercise Warrants
The undersigned Holder hereby irrevocably elects to exercise Warrants
represented by this Warrant, and to purchase the securities issuable upon the
exercise of such Warrants, and requests that certificates for such securities
shall be issued in the Holder's name and be delivered to
[please print or type address]
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant, that a new Warrant for the balance of such Warrants be registered in
the name of, and delivered to, the Holder at the address stated above.
The undersigned acknowledges that, if this Exercise Form is submitted
prior to the Company having given notice that the issuance of the Warrant Shares
has been registered under the Securities Act, the Warrant Shares issued on
exercise will be "restricted securities" and will bear appropriate restrictive
legends.
Dated:
Signature of Holder
Signature Guaranteed
21
<PAGE>
ASSIGNMENT
To Be Executed by the Holder
in Order to Assign Warrants
THE WARRANTS REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER FEDERAL
OR STATE SECURITIES LAWS AND TRANSFER THEREOF HAS BEEN RESTRICTED. ANY TRANSFER
OR PURPORTED TRANSFER DESCRIBED IN THIS FORM OF ASSIGNMENT SHALL NOT BE
EFFECTIVE UNTIL AND UNLESS THE PROPOSED TRANSFEREE COMPLIES WITH THE
RESTRICTIONS ON TRANSFER DESCRIBED IN THE WARRANT CERTIFICATE.
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto
Name:
[please print or type]
Address:
Social Security:
or Taxpayer
I.D. No.
the undersigned's right to purchase up to ______________ Shares of Common Stock
represented by this Warrant, and hereby irrevocably constitutes and appoints
______________________________________ attorney to transfer the same on the
books of the Company, with full power of substitution in the premises.
Dated:
Signature Guaranteed
22
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT is made as of the 9th day of
January, 1998, by and among COVOL TECHNOLOGIES, INC., a Delaware corporation
(the "Company"), and AJG FINANCIAL SERVICES, INC. and its successors, assigns
and transferees (herein referred to collectively as the "Holders" and
individually as a "Holder").
W I T N E S S E T H:
WHEREAS, on the date hereof, Holder is the holder of those certain
Warrants To Purchase Common Stock of the Company, both issued January 9, 1998,
to AJG Financial Services, Inc., one designated Warrant A for 216, 272 Shares of
Common Stock, and the other designated Warrant B for 216, 272 Shares of Common
Stock.
WHEREAS, the Company has agreed to provide the Holders with certain
registration rights as set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings contained herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, and subject to and
on the terms and conditions herein set forth, the parties hereto agree as
follows:
1. Definitions.
As used in this Agreement, the following capitalized defined terms
shall have the following meanings:
"Company" shall have the meaning set forth in the preamble and shall
also include the Company's successors.
"Company Common Stock" shall mean the shares of common stock, $.001 par
value per share, of the Company.
"Effective Date" shall mean the date of this Agreement.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
"Holder" or "Holders" shall have the meaning set forth in the preamble.
"Person" shall mean an individual, partnership, corporation, trust, or
unincorporated organization, or a government or agency or political subdivision
thereof.
1
<PAGE>
"Prospectus" shall mean the prospectus included in a Registration
Statement, and any such prospectus as amended or supplemented by any prospectus
supplement with respect to the terms of the offering of any portion of the
Registrable Securities covered by a Registration Statement, and by all other
amendments and supplements to such prospectus, including post-effective
amendments, and in each case including all material incorporated by reference
therein.
"Public Sale" shall mean a public sale or distribution of Registrable
Securities, including a sale pursuant to Rule 144 (or any similar provision then
in effect) under the Securities Act.
"Registrable Securities" shall mean the Shares, excluding (i) Shares
for which a Registration Statement relating to the sale thereof by the Holder
shall have become effective under the Securities Act and which have been
disposed of by the Holder under such Registration Statement, and (ii) Shares
sold or otherwise distributed pursuant to Rule 144 under the Securities Act.
"Registration Expenses" shall mean any and all expenses incident to
performance of or compliance with this Agreement, including, without limitation:
(i) all SEC or National Association of Securities Dealers, Inc. ("NASD")
registration and filing fees, (ii) all fees and expenses incurred in connection
with compliance with state securities or blue sky laws (including reasonable
fees and disbursements of counsel in connection with blue sky qualification of
any of the Registrable Securities and the preparation of a Blue Sky Memorandum)
and compliance with the rules of the NASD, (iii) all expenses of any Persons
engaged by the Company in preparing or assisting in preparing, word processing,
printing and distributing any Registration Statement, any Prospectus,
certificates and other documents relating to the performance of and compliance
with this Agreement, (iv) all fees and expenses incurred in connection with the
listing, if any, of any of the Registrable Securities on any securities exchange
or exchanges pursuant to Section 3(a)(vii) hereof, and (v) the fees and
disbursements of counsel for the Company and of the independent public
accountants of the Company, including the expenses of any special audits or
"cold comfort" letters, if any, required by or incident to such performance and
compliance. Registration Expenses shall specifically exclude the fees and
disbursements of counsel representing a selling Holder and underwriting
discounts and commissions, and transfer taxes, if any, relating to the sale or
disposition of Registrable Securities by a selling Holder, all of which shall be
borne by such Holder in all cases.
"Registration Statement" shall mean a registration statement of the
Company and any other entity required to be a registrant with respect to such
registration statement pursuant to the requirements of the Securities Act which
covers the Registrable Securities requested by Holders to be covered by such
registration statement, and all amendments and supplements to such registration
statement, including post-effective amendments, in each case including the
Prospectus contained therein, all exhibits thereto and all materials
incorporated by reference therein.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended from
time to time.
2
<PAGE>
"Selling Holder" shall mean each Holder who elects to participate in an
underwritten public offering of Company Common Stock.
"Shares" shall mean Company Common Stock that is issued upon exercise
of the Warrants.
"Warrants" shall mean the two Warrants (one designated Warrant A and
the other designated Warrant B), each dated January 9, 1998, issued by the
Company to AJG Financial Services, Inc. evidencing rights to purchase initially
up to an aggregate of 432,544 shares of Common Stock, and all warrants issued
upon transfer, division or combination of, or in substitution or exchange for,
any thereof.
2. Registration Under the Securities Act.
(a) Filing of Registration Statement. As promptly as
practicable after the date hereof, the Company intends, but is not obligated, to
cause to be filed a Registration Statement providing for the issuance of the
Shares to the Holder to the extent allowed by applicable regulations and the
resale by the Holder of Registrable Securities then held by the Holder and
intends to use its best efforts to cause such Registration Statement if filed to
be declared effective by the SEC as soon as reasonably practicable. The Company
agrees to use its best efforts to keep such Registration Statement continuously
effective under the Securities Act for a period expiring on the date two (2)
years from the date of the last issuance of any Shares and further agrees to
supplement or amend the Registration Statement, if and as required by the rules,
regulations or instructions applicable to the registration form used by the
Company for such Registration Statement or by the Securities Act or by any other
rules and regulations thereunder for such Registration Statement.
(b) Demand Registration. In the event the Company has not
caused to be filed a Registration Statement as provided in Section 2(a) within
six (6) months from the date hereof, Holder shall have the right, at any time
and from time to time after such six (6) month period, to demand that the
Company cause to be filed a Registration Statement or an amendment to a
Registration Statement providing for the registration under the Securities Act
of the Shares to be issued to Holder to the extent allowed by applicable
regulations and the resale by the Holder of all Registrable Securities, or, in
the event the Company has filed a Registration Statement as provided in Section
2(a) within six (6) months from the date hereof, but such Registration Statement
has not been declared effective by the SEC, Holder shall have the right at any
time and from time to time after September 1, 1998, to demand that the Company
cause to be filed a Registration Statement or an amendment to a Registration
Statement providing for the registration under the Securities Act of the Shares
to be issued to Holder and the resale by the Holder of all Registrable
Securities; provided, however, if at the time of such demand, the Shares have
been issued, such Registration Statement shall only relate to sales by Holder.
The Company agrees to use its best efforts to keep such Registration Statement
continuously effective under the Securities Act for a period expiring on the
date two (2) years from the date of the last issuance of any Shares and further
agrees to supplement or amend the Registration Statement, if and as required by
the rules, regulations or instructions
3
<PAGE>
applicable to the registration form used by the Company for such Registration
Statement or by the Securities Act or by any other rules and regulations
thereunder for such Registration Statement.
(c) Cut-Back Registration. In the event that the Holder has
requested the inclusion of Registrable Securities in a registration statement
pursuant to Section 3(a) or Section 3(b) and all or a portion of the Registrable
Securities with respect to which the Holder has requested registration are not
registered by virtue of the provisions of said sections, Holder shall thereupon
have the right to require the registration under the Securities Act of such
Registrable Securities pursuant to the provisions of Section 2(b), irrespective
of whether the date upon which Registration is requested is within six months of
the date of this Agreement.
(d) Expenses. The Company shall pay all Registration Expenses
in connection with any Registration Statement filed pursuant to this Section 2.
(e) Inclusion in Registration Statement. The Company may
require each Holder of Registrable Securities to furnish to the Company in
writing such information regarding the proposed offer or sale by such Holder of
such Registrable Securities as the Company may from time to time reasonably
request in writing. Any Holder who does not provide the information reasonably
requested by the Company in connection with the Registration Statement as
promptly as practicable after receipt of such request, but in no event later
than ten (10) days thereafter, shall not be entitled to have its Registrable
Securities included in the Registration Statement.
(f) Underwritten Demand by Holder. If at the demand of Holder,
the Company proposes to file a Registration Statement relating to an
underwritten public offering of any Registerable Securities and the investment
banking firm selected by Holder to act as lead underwriter in connection with
such public offering of securities by Holder advises in writing that, in such
firm's opinion, a registration of other securities of the Company at that time
would materially and adversely affect the offering by Holder, no person
(including the Company) shall have a right to have shares of common stock or
other securities included in such Registration Statement; provided, however,
that if an offering of some but not all of the shares requested to be registered
by Holder would not adversely affect the offering by Holder, the aggregate
number of shares requested to be included in such offering by the Company and
each other person shall be reduced pro rata according to the total number of
securities proposed to be sold by the Company and other Person taken as a whole;
provided, in no event shall the shares requested by Holder to be included in the
Registration Statement be reduced.
(g) Rights to Subsequent Investors. The Company shall not
grant any rights to any other person which shall diminish in any way the rights
granted to the Holders hereunder. The Company may grant subsequent investors
rights of registration (such as those provided in Section 2 hereof); provided,
however, that (i) such rights are limited to shares of Common Stock (including,
in the case of any underwritten offering, shares issuable upon the conversion of
convertible securities or upon the exercise of warrants if such conversion or
exercise is effected by the sellers or the
4
<PAGE>
underwriters prior to sale to the public in such offering), (ii) such rights are
not inconsistent with the provisions hereof; (iii) the instrument granting such
rights specifically confirms the rights of the Holders of Registrable Shares
hereunder; (iv) the rights of the Holder hereunder shall be the same as the
rights of registration granted to the subsequent investors.
3. Incidental Registration.
(a) If the Company proposes to register any shares of Company
Common Stock ("Other Securities") for public sale by the Company pursuant to an
underwritten offering under the Securities Act it will give prompt written
notice to Holders of its intention to do so, and upon the written request of
Holders delivered to the Company within fifteen (15) Business Days after the
giving of any such notice which request shall specify the number of Registrable
Securities intended to be disposed of by Holders and the Company shall include
such Registrable Securities in such Registration Statement. The Company will not
be required to effect any registration pursuant to this Section 3(a) if the
Company shall have been advised in writing (with a copy to the Selling Holders)
by a nationally recognized independent investment banking firm selected by the
Company to act as lead underwriter in connection with the public offering of
securities by the Company that, in such firm's opinion, a registration at that
time by other holders would materially and adversely affect the Company's own
scheduled offering; provided, however, that if an offering of some but not all
of the shares requested to be registered by Holder and other holders would not
adversely affect the Company's offering, the aggregate number of shares
requested to be included in such offering by each selling holder shall be
reduced pro rata according to the total number of securities proposed to be sold
by the selling holders taken as a whole.
(b) If at the demand of any other Person but the Holder
("Other Person"), the Company proposes to register Other Securities for public
sale pursuant to an underwritten offering under the Securities Act it will give
prompt written notice to Holder of its intention to do so, and upon the written
request of Holders delivered to the Company within fifteen (15) Business Days
after the giving of any such notice which request shall specify the number of
Registrable Securities intended to be disposed of by Holder and the Company
shall include such Registrable Securities in such Registration Statement. If the
Other Person shall have been advised in writing (with a copy to the Selling
Holders) by a nationally recognized independent investment banking firm acting
as lead underwriter in connection with the public offering of securities by the
Other Person that, in such firm's opinion, a registration by the Holders at that
time would materially and adversely affect the offering by the Other Person, the
Registrable Securities of the Holder shall not be included in such Registration,
provided the number of shares requested to be included in such offering by the
Holders and all other Persons shall be reduced pro rata according to the total
number of securities proposed to be sold by the Holder and other selling holders
taken as a whole; provided, however, notwithstanding the foregoing sentence, the
shares requested by the Other Person demanding registration to be included in
the Registration Statement shall not be reduced if required by an agreement
between such Other Person and the Company.
5
<PAGE>
(c) With respect to any proposed sale or sale by the Holder of
Registrable Securities pursuant to this Section 3 the Company shall pay all
Registration Expenses.
(d) No registration of Registrable Securities effected under
this Section 3 shall relieve the Company of its obligation (if any) to effect
registrations of Registrable Securities pursuant to Section 2.
4. Registration Procedures.
(a) Obligations of the Company. In connection with any
Registration Statement pursuant to Sections 2 or 3 hereof, the Company shall:
(i) cause the Registration Statement to be
available for the sale of the Registrable
Securities by Holders in one or more
transactions, in negotiated transactions,
through the writing of options of the
Registrable Securities, or a combination of
such methods of sale, and to comply as to
form in all material respects with the
requirements of the applicable form and
include all financial statements required by
the SEC to be filed therewith and in the
event the Company is listed on the NASDAQ
National Market System ("NMS") in one or
more transactions on NMS or otherwise in
special offerings, exchange distributions or
secondary distribution pursuant to and in
accordance with the rules of the NMS, in the
over-the-counter market;
(ii) (A) prepare and file with the SEC such
amendments and post- effective amendments to
any Registration Statement as may be
necessary to keep each such Registration
Statement effective for the applicable
period; (B) cause the Prospectus included in
each such Registration Statement to be
supplemented by any required prospectus
supplement, and as so supplemented to be
filed pursuant to Rule 424 or any similar
rule that may be adopted under the
Securities Act; (C) respond promptly to any
comments received from the SEC with respect
to each Registration Statement, or any
amendment, post-effective amendment or
supplement relating thereto; and (D) comply
with the provisions of the Securities Act
with respect to the disposition of all
securities covered by each Registration
Statement;
(iii) furnish to each Holder of Registrable
Securities, without charge, as many copies
of each Prospectus, and any amendment or
supplement thereto and such other documents
as they may reasonably request, in order to
facilitate the public sale or other
disposition of the Registrable Securities;
the Company consents to the use of the
6
<PAGE>
Prospectus, by each such Holder of
Registrable Securities, in connection with
the offering and sale of the Registrable
Securities covered by the Prospectus;
(iv) notify promptly each Holder of Registrable
Securities and confirm such advice in
writing (A) of the issuance by the SEC or
any state securities authority of any stop
order suspending the effectiveness of a
Registration Statement or the initiation of
any proceedings for that purpose, (B) if the
Company receives any notification with
respect to the suspension of the
qualification of the Registrable Securities
for sale in any jurisdiction or the
initiation of any proceeding for such
purpose, and (C) of the happening of any
event during the period a Registration
Statement is effective as a result of which
such Registration Statement or the related
Prospectus contains any untrue statement of
a material fact or omits to state any
material fact required to be stated therein
or necessary to make the statements therein,
in light of the circumstances under which
they were made (in the case of the
Prospectus), not misleading;
(v) use its best effort to obtain the withdrawal
of any order suspending the effectiveness of
a Registration Statement at the earliest
possible moment;
(vi) use its best efforts to register or qualify
the Registrable Securities by the time the
applicable Registration Statement is
declared effective by the SEC under all
applicable state securities or "blue sky"
laws of such jurisdictions as any Holder of
Registrable Securities covered by a
Registration Statement shall reasonably
request in writing, keep each such
registration or qualification effective
during the period such Registration
Statement is required to be kept effective
or during the period offers or sales are
being made by a Holder that has delivered a
Registration Notice to the Company,
whichever is shorter, and do any and all
other acts and things which may be
reasonably necessary or advisable to enable
such Holder to consummate the disposition in
each such jurisdiction of such Registrable
Securities owned by such Holder; provided,
however, that the Company shall not be
required to (A) qualify generally to do
business in any jurisdiction or to register
as a broker or dealer in such jurisdiction
where it would not otherwise be required to
qualify but for this Section 4(a)(vi), (B)
subject itself to taxation in any such
jurisdiction, or (C) submit to the general
service of process in any such jurisdiction;
7
<PAGE>
(vii) upon the occurrence of any event
contemplated by Section 4(a)(iv)(C) hereof,
use its best efforts promptly to prepare and
file a supplement or prepare, file and
obtain effectiveness of a post-effective
amendment to a Registration Statement or the
related Prospectus or any document
incorporated therein by reference or file
any other required document so that, as
thereafter delivered to the purchasers of
the Registrable Securities, such Prospectus
will not contain any untrue statement of a
material fact or omit to state a material
fact required to be stated therein or
necessary to make the statements therein, in
the light of the circumstances under which
they were made, not misleading;
(viii) use its best efforts to cause all
Registrable Securities to be listed on any
securities exchange on which similar
securities issued by the Company are then
listed;
(ix) provide a CUSIP number for all Registrable
Securities, not later than the effective
date of the Registration Statement or
amendment thereto relating to such
Registrable Securities;
(x) otherwise use its best efforts to comply
with all applicable rules and regulations of
the SEC and make available to its security
holders, as soon as reasonably practicable,
an earning statement covering at least
twelve (12) months which shall satisfy the
provisions of Section 11(a) of the
Securities Act and Rule 158 thereunder; and
(xi) use its best efforts to cause the
Registrable Securities covered by a
Registration Statement to be registered with
or approved by such other governmental
agencies or authorities as may be necessary
by virtue of the business and operations of
the Company to enable Holders to consummate
the disposition of such Registrable
Securities.
(b) Obligations of Holders. In connection with and as a
condition to the Company's obligations with respect to a Registration Statement
pursuant to Section 2 hereof and this Section 4, each Holder agrees that (i) it
will not offer or sell its Registrable Securities under the Registration
Statement until it has received copies of the supplemental or amended Prospectus
contemplated by Section 4(a)(ii) hereof and receives notice that any
post-effective amendment has become effective; and (ii) upon receipt of any
notice from the Company of the happening of any event of the kind described in
Section 4(a)(iv)(C) hereof, such Holder will forthwith discontinue disposition
of Registrable Securities pursuant to a Registration Statement until such Holder
receives copies of the supplemented or amended Prospectus contemplated by
Section 4(a)(vii) hereof and receives notice that any post-effective amendment
has become effective, and, if so directed by the Company, such Holder will
deliver to the Company (at the expense of the Company) all copies in
8
<PAGE>
its possession, other than permanent file copies then in such Holder's
possession, of the Prospectus covering such Registrable Securities current at
the time of receipt of such notice.
(c) Lockup. In the event the Company proposes to effect the
distribution of its securities by the Company through an underwritten public
offering, each Holder who then beneficially owns in excess of 100,000 shares
agrees for a period of time, beginning seven (7) days prior to the effective
date of the underwriting agreement pertaining to such offering and ending thirty
(30) days after such effective date that such Holder will forthwith cease any
sale or other disposition of any of the Registrable Securities or sale or other
disposition of any of its Registrable Securities during such period of time, if
requested in writing by the representatives of the underwriters for any such
underwritten public offering; provided, however, that Holders shall not be
subject to more than one Lockup Period during any twelve (12) month period.
5. Indemnification; Contribution.
(a) Indemnification by the Company. The Company agrees to
indemnify and hold harmless each Holder, each officer and director of such
Holder, and each Person, if any, who controls any Holder within the meaning of
Section 15 of the Securities Act as follows:
(i) against any and all loss, liability, claim,
damage and expense whatsoever, as incurred,
arising out of any untrue statement or
alleged untrue statement of a material fact
contained in any Registration Statement (or
any amendment thereto) pursuant to which
Registrable Securities were registered under
the Securities Act, including all documents
incorporated therein by reference, or the
omission or alleged omission therefrom of a
material fact necessary in order to make the
statements therein, in the light of the
circumstances under which they were made,
not misleading;
(ii) against any and all loss, liability, claim,
damage and expense whatsoever, as incurred,
to the extent of the aggregate amount paid
in settlement of any litigation, or
investigation or proceeding by any
governmental agency or body, commenced or
threatened, or of any claim whatsoever based
upon any such untrue statement or omission,
or any such alleged untrue statement or
omission, if such settlement is effected
with the written consent of the Company; and
(iii) against any and all expense whatsoever, as
incurred (including reasonable fees and
disbursements of counsel), reasonably
incurred in investigating, preparing or
defending against any litigation, or
investigation or proceeding by any
governmental agency or body, commenced or
threatened, in each case whether or not a
party, or any claim whatsoever based upon
any such untrue statement or omission,
9
<PAGE>
or any such alleged untrue statement or
omission, to the extent that any such
expense is not paid under subparagraph (i)
or (ii) above;
provided, however, that the indemnity provided pursuant to this Section 4(a)
does not apply to any Holder with respect to any loss, liability, claim, damage
or expense to the extent arising out of any untrue statement or omission or
alleged untrue statement or omission made in reliance upon and in conformity
with written information furnished to the Company by such Holder expressly for
use in a Registration Statement (or any amendment thereto) or any Prospectus (or
any amendment or supplement thereto).
(b) Indemnification by the Holders. Each Holder severally
agrees to indemnify and hold harmless the Company and the other selling Holders,
and each of their respective directors and officers (including each director and
officer of the Company who signed the Registration Statement), and each Person,
if any, who controls the Company or any other selling Holder within the meaning
of Section 15 of the Securities Act, to the same extent as the indemnity
contained in Section 5(a) hereof (except that any settlement described in
Section 4(a)(ii) shall be effected only with the written consent of such
Holder), but only insofar as such loss, liability, claim, damage or expense
arises out of or is based upon (i) any untrue statement or omission, or alleged
untrue statements or omissions, made in a Registration Statement (or any
amendment thereto) or any Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with written information furnished to the
Company by such selling Holder expressly for use in such Registration Statement
(or any amendment thereto) or such Prospectus (or any amendment or supplement
thereto), or (ii) such Holder's failure to deliver a Prospectus to any purchaser
of Registrable Securities where such a delivery obligation was applicable to
such Holder's sale of Registrable Securities and such Holder had been provided
with sufficient copies of such Prospectus for the relevant deliveries thereof.
In no event shall the liability of any Holder under this Section 4(b) be greater
in amount than the dollar amount of the proceeds received by such Holder upon
the sale of the Registrable Securities giving rise to such indemnification
obligation.
(c) Conduct of Indemnification Proceedings. Each indemnified
party shall give reasonably prompt notice to each indemnifying party of any
action or proceeding commenced against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party (i) shall not
relieve it from any liability which it may have under the indemnity agreement
provided in Section 4(a) or (b) above, unless and to the extent it did not
otherwise learn of such action and the lack of notice by the indemnified party
results in the forfeiture by the indemnifying party of substantial rights and
defenses and (ii) shall not, in any event, relieve the indemnifying party from
any obligations to any indemnified party other than the indemnification
obligation provided under Section 4(a) or (b) above. If the indemnifying party
so elects within a reasonable time after receipt of such notice, the
indemnifying party may assume the defense of such action or proceeding at such
indemnifying party's own expense with counsel chosen by the indemnifying party
and approved by the indemnified parties defendant in such action or proceeding,
which approval shall not be unreasonably withheld; provided, however, that, if
such indemnified party or parties reasonably determine that a conflict of
interest exists where it is advisable for such indemnified party
10
<PAGE>
or parties to be represented by separate counsel or that, upon advice of
counsel, there may be legal defenses available to them which are different from
or in addition to those available to the indemnifying party, then the
indemnifying party shall not be entitled to assume such defense and the
indemnified party or parties shall be entitled to one separate counsel at the
indemnifying party's expense. If an indemnifying party is not entitled to assume
the defense of such action or proceeding as a result of the proviso to the
preceding sentence, such indemnifying party's counsel shall be entitled to
conduct the defense of such indemnified party or parties, it being understood
that both such counsel will cooperate with each other to conduct the defense of
such action or proceeding as efficiently as possible. If an indemnifying party
is not so entitled to assume the defense of such action or does not assume such
defense, after having received the notice referred to in the first sentence of
this paragraph, the indemnifying party or parties will pay the reasonable fees
and expenses of counsel for the indemnified party or parties. In such event,
however, no indemnifying party will be liable for any settlement effected
without the written consent of such indemnifying party. If an indemnifying party
is entitled to assume, and assumes, the defense of such action or proceeding in
accordance with this paragraph, such indemnifying party shall not be liable for
any fees and expenses of counsel for the indemnified parties incurred thereafter
in connection with such action or proceeding. The indemnification obligations
provided pursuant to Sections 4(a) and (b) hereof survive, with respect to a
Holder, the transfer of Registrable Securities by such Holder, and with respect
to a Holder or the Company, shall remain in full force and effect regardless of
any investigation made by or on behalf of any indemnified party.
(d) Contribution.
(i) In order to provide for just and equitable
contribution in circumstances in which the
indemnity agreement provided for in this
Section 4 is for any reason held to be
unenforceable although applicable in
accordance with its terms, the Company and
the selling Holders shall contribute to the
aggregate losses, liabilities, claims,
damages and expenses of the nature
contemplated by such indemnity agreement
incurred by the Company and the selling
Holders, in such proportion as is
appropriate to reflect the relative fault of
and benefits to the Company on the one hand
and the selling Holders on the other (in
such proportions that the selling Holders
are severally, not jointly, responsible for
the balance), in connection with the
statements or omissions which resulted in
such losses, claims, damages, liabilities or
expenses, as well as any other relevant
equitable considerations. The relative
benefits to the indemnifying party and
indemnified parties shall be determined by
reference to, among other things, the total
proceeds received by the indemnified party
and indemnified parties in connection with
the offering to which such losses, claims,
damages, liabilities or expenses relate. The
relative fault of the indemnifying party and
indemnified parties shall be determined by
reference to, among other things, whether
the action in question,
11
<PAGE>
including any untrue or alleged untrue
statement of a material fact or omission or
alleged omission to state a material fact,
has been made by, or relates to information
supplied by, such indemnifying party or the
indemnified parties, and the parties'
relative intent, knowledge, access to
information and opportunity to correct or
prevent such action.
(ii) The Company and the Holders agree that it
would not be just or equitable if
contribution pursuant to this Section 4(d)
were determined by pro rata allocation or by
any other method of allocation which does
not take account of the equitable
considerations referred to in the
immediately preceding paragraph.
Notwithstanding the provisions of this
Section 4(d), no selling Holder shall be
required to contribute any amount in excess
of the amount by which the total price at
which the Registrable Securities of such
selling Holder were offered to the public
exceeds the amount of any damages which such
selling Holder would otherwise have been
required to pay by reason of such untrue
statement or omission.
(iii) Notwithstanding the foregoing, no Person
guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the
Securities Act) shall be entitled to
contribution from any Person who was not
guilty of such fraudulent misrepresentation.
For purposes of this Section 4(d), each
Person, if any, who controls a Holder within
the meaning of Section 15 of the Securities
Act and directors and officers of a Holder
shall have the same rights to contribution
as such Holder, and each director of the
Company, each officer of the Company who
signed the Registration Statement and each
Person, if any, who controls the Company
within the meaning of Section 15 of the
Securities Act shall have the same rights to
contribution as the Company.
(iv) The contribution provided for in this
Section 4(d) shall survive, with respect to
a Holder, the transfer of Registrable
Securities by such Holder, and with respect
to a Holder or the Company, shall remain in
full force and effect regardless of any
investigation made by or on behalf of any
indemnified party.
6. Rule 144 Sales.
(a) Reports. The Company covenants that it will file the
reports required to be filed by the Company under the Securities Act and the
Securities Exchange Act of 1934, as amended, and will take such further action
as any Holder of Registrable Securities may reasonably request, all to
12
<PAGE>
the extent required to enable such Holder to sell Registrable Securities
pursuant to Rule 144 under the Securities Act.
(b) Certificates. In connection with any sale, transfer or
other disposition by any Holder of any Registrable Securities pursuant to Rule
144 under the Securities Act, the Company shall cooperate with such Holder to
facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be sold and not bearing any Securities Act legend, and
enable certificates for such Registrable Securities to be for such number of
shares and registered in such names as the selling Holders may reasonably
request at least two (2) business days prior to any sale of Registrable
Securities.
7. Miscellaneous.
(a) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given without the written consent of the Company and the Holders of a
majority in amount of the outstanding Registrable Securities; provided, however,
that no amendment, modification or supplement or waiver or consent to the
departure with respect to the provisions of Sections 2, 3, 4, 5, 6 or 7 hereof
shall be effective as against any Holder of Registrable Securities unless
consented to in writing by such Holder of Registrable Securities, as the case
may be. Notice of any amendment, modification or supplement to this Agreement
adopted in accordance with this Section 6(a) shall be provided by the Company to
each Holder of Registrable Securities at least thirty (30) days prior to the
effective date of such amendment, modification or supplement.
(b) Notices. All notices and other communications provided for
or permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, telex, telecopier, or any courier guaranteeing overnight
delivery, (i) if to a Holder, at the most current address given by such Holder
to the Company by means of a notice given in accordance with the provisions of
this Section 6(b), which address initially is, with respect to each Holder, the
address set forth next to such Holder's name on the books and records of the
Company, or (ii) if to the Company, at: Covol Technologies, Inc., 3280 North
Frontage Road, Lehi, Utah 84043; Facsimile: (801) 768-4483; Attn: General
Counsel.
All such notices and communications shall be deemed to have
been duly given: at the time delivered by hand, if personally delivered; five
(5) business days after being deposited in the mail, postage prepaid, if mailed;
when answered back, if telexed; when receipt is acknowledged, if telecopied; or
at the time delivered if delivered by an air courier guaranteeing overnight
delivery.
(c) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors, assigns and transferees of each
of the Company and the Holders, including without limitation and without the
need for an express assignment, subsequent Holders. If any successor, assignee
or transferee of any Holder shall acquire Registrable Securities, in any
13
<PAGE>
manner, whether by operation of law or otherwise, such Registrable Securities,
as the case may be, shall be held subject to all of the terms of this Agreement,
and by taking and holding such Registrable Securities such Person shall be
entitled to receive the benefits hereof and shall be conclusively deemed to have
agreed to be bound by all of the terms and provisions hereof.
(d) Headings. The headings in this Agreement are for the
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(e) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE WITHOUT GIVING
EFFECT TO THE CONFLICTS OF LAW PROVISIONS THEREOF.
(f) Specific Performance. The Company and the Holders hereto
acknowledge that there would be no adequate remedy at law if any party fails to
perform any of its obligations hereunder, and accordingly agree that each party,
in addition to any other remedy to which it may be entitled at law or in equity,
shall be entitled to compel specific performance of the obligations of any other
party under this Agreement in accordance with the terms and conditions of this
Agreement in any court of the United States or any State thereof having
jurisdiction.
(g) Entire Agreement. This Agreement is intended by the
Company as a final expression of its agreement and intended to be a complete and
exclusive statement of the agreement and understanding of the Company in respect
of the subject matter contained herein. This Agreement supersedes all prior
agreements and understandings of the Company with respect to such subject
matter.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
COVOL TECHNOLOGIES, INC.
By:/Stanley M. Kimball/
---------------------------
Name:Stanley M. Kimball
Title: President
AJG FINANCIAL SERVICES, INC.
By: /David R. Long/
---------------------------
Name: David R. Long
Title: President
14
EMPLOYMENT AGREEMENT
By and Between
COVOL TECHNOLOGIES, INC.
And
Steven G. Stewart
Effective as of
May 1, 1998
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this Agreement@) is effective as of the 1st
day of May, 1998 (the AEffective Date@) by and between COVOL TECHNOLOGIES, INC.
a Delaware Corporation (the ACompany@), and Steven G. Stewart (AEmployee@). The
Company and Employee are sometimes later in this Agreement collectively referred
to as the AParties.@
RECITALS
This Agreement is entered into with reference to the following facts,
definitions, and objectives:
A. Employee is a Certified Public Accountant and immediately prior to
his employment by the Company, was employed by Coopers & Lybrand, LLP as a
Business Assurance Partner.
B. Employee=s services are deemed to be of value to the Company and it
is recognized that inducements must be offered to Employee in order that the
company may obtain and retain Employee=s services.
NOW THEREFORE, in consideration of this Agreement and of the covenants
and conditions contained in this Agreement, the Parties agree as follows:
1. Employment and Positions.
(a) Positions. The Company employed Employee and Employee
accepted employment by the Company as an officer of the Company with the title
of AVice President of Finance and Treasurer@ for the Period of Employment
specified in Paragraph 3 (APeriod of Employment@). Such position and title,
including related duties and responsibilities, may be changed during the term of
this contract provided that such Employee continues as an officer of the
Company. Also, provided further that any new position would be of comparable or
higher responsibility level with compensation for such services at a level at or
above the Employees then current compensation level prior to such title and/or
position change.
2. Services to be Rendered. The Employee shall, during the Period of
Employment, serve the Company in the positions set forth in Paragraph 1
(AEmployment and Positions@) diligently, competently, and in conformance with
the corporate policies of the Company. Employee shall have the responsibility to
always act in the best interest of the Company and recognizes opportunities,
ideas, and intellectual property relating to the business of the Company that
are developed as an officer or employee of Covol Technologies, Inc. remain the
property of Company. In fulfilling his duties and responsibilities under this
Agreement, Employee shall report to the President and/or the Chief Executive
Officer of the Company.
1
<PAGE>
3. Period of Employment. Employee=s employment by the Company pursuant
to this Agreement shall, began as of May 1, 1998 (the AEffective Date@). The
period of employment continues for a period of three (3) years from the
Effective Date (APeriod of Employment@) renewing annually on May 1st so as to
result in a continuing effective period of three (3) years from the renewal date
until normal retirement or resignation by the employee.
4. Base Salary. At the commencement of the Period of Employment,
Employee shall be paid a yearly base salary of $80,000. Base salary shall be
paid in semi monthly installments during the Period of Employment. The base
salary will be increased effective May 1, 1999 by 25% to a yearly base salary of
$100,000. The base salary will be increase effective May 1, 2000 by 25% to a
yearly base salary of $125,000. It is recognized by the Company and Employee
that a Salary Compensation Study has recently been conducted and the base salary
of this Employee may be adjusted in the future as a result of this Salary
Compensation Study. If and when the base salary is adjusted as a result of this
study, the salary increases as provided in this paragraph will be adjusted so
that the increase will not result in the percentage reflected herein but will
instead result in the actual dollar amount increases set forth herein of $20,000
and $25,000 in the respective years.
5. Incentive Bonus. During the Period of Employment, Employee shall be
entitled to receive a bonus pursuant to the Company=s bonus plan, if any, as in
effect from time to time. It is recognized that a bonus plan, if any, is
established at the discretion of the Company and may be subject to variables and
conditions including income performance and general performance evaluations.
6. Expense Reimbursement. The Employee shall be entitled to prompt
reimbursement for reasonable expenses incurred by the Employee in performing
services for the Company. Employee shall be required to provide proof and
documentation of such expenditures as required by the Company.
7. Grant of Options. The Company may grant from time to time to the
Employee, in accordance with the terms of a stock option agreement, the right
and option to purchase shares of the Company=s Common Stock .
(a) Stock Options Pursuant to Stock Option Plan. Any Stock
Options (AStock Option@) issued shall be issued pursuant and subject to the
provisions of the Company Employee Stock Option Plan (the AStock Option Plan@)
or as approved by the Board of Directors. Number of options, purchase price,
exercise periods and vesting requirements shall be included in the stock option
document.
(b) Vesting of Options in Event of Full and Complete
Disability or Death. In the event of full and complete disability or death of
the employee any unvested Stock Options shall vest effective as of the date of
the full and complete disability or the death of Employee. In the event of
Employee=s full and complete disability or death, the Employee, heirs or estate
of Employee, as the case may be, may exercise any unexecuted options at any time
subject to the time limitations within which exercise of option must occur.
2
<PAGE>
(c) Vesting of Options in Event of Ownership Change. In the
event a change in control, all non-vested Stock Options shall vest immediately
prior to such stock or asset purchase. A change in control shall be deemed to
have taken place if, as the result of a tender offer, merger, consolidation,
sale of substantially all assets, a third party purchase of a controlling
interest of the total outstanding shares of the Company, or any combination of
the foregoing transactions, the person s who were directors of the Company
immediately before the transaction shall cease to constitute a majority of the
board of directors of the Company or any successor to the Company. The intent of
this section is to allow the Employee to exercise any unexercised options at the
Employee=s discretion.
(d) Options Granted. In connection with acceptance of
employment as provided herein, Employee is granted qualified incentive stock
options under the Company Employee Stock Option Plan to purchase 50,000 shares
of the Company=s Common Stock at a price of $12.625. These options will vest on
a pro-rata basis over 60 months beginning May 1, 1998 and are exercisable
through April 30, 2008.
8. Other Benefits. In addition to the benefits previously set
forth in this Agreement, Employee shall, during the Period of Employment, be
entitled to the benefits described below, and as concerns all such benefit
programs where years of service are a factor, to the extent permitted by law,
Employee shall be given credit for his years of service with Covol Technologies,
Inc. prior to the implementation of any benefit program.
(a) Vacation. During the Period of Employment, Employee shall
be entitled to not less than four weeks of paid vacation during each calendar
year occurring during the Period of Employment. Any and all unused vacation
will, at the Company's option, be paid for by the Company at the end of each
calendar year, or will carry forward from year to year until taken by the
Employee or paid the Employee by the Company. Upon termination of Employee=s
employment under this Agreement, Employee shall be paid for any unused vacation
in the year in which the termination occurred, and vacation will continue to
accrue up to and including the termination date in proportionate to the amount
of time employed during that year.
(b) Sick Leave. Leave time will be granted to the Employee
that is reasonable under the circumstances and that is consistent with the
Company=s policies and procedures, as the same may be changed, modified or
provided for other officers of the Company from time to time.
(c) Insurance. Participation in the group insurance program of
the Company as concerns life, disability, medical and dental insurance currently
available to other employee=s as the same may be implemented, changed, modified
or terminated for all participants from time to time. Employee shall be required
to pay that portion of the premiums for coverage under such insurance that is
payable by other officers of the Company for their insurance coverage.
3
<PAGE>
(d) Retirement Plan. The Employee shall participate in the
Company=s Retirement Plans in accordance with the terms and provision and
applicable law as the same may be implemented, changed, amended, or terminated
from time to time. Employee shall become eligible to participate in the
Company=s Retirement Plans at date of hire or as of the effective date of the
implementation of such plans, whichever is later.
(e) Automobile Allowance. The Company will provide the
Employee a monthly automobile allowance. This allowance is to compensate the
Employee for the use of his personal automobile in the amount of $550 per month
during the Employment Period
(f) Other Miscellaneous Benefits. The Company shall pay or
reimburse Employee for the following miscellaneous benefits:
(i) Annual dues for association membership for
relevant professional groups and organizations as deemed appropriate by the
Employee.
(ii) Subscription and purchase of books, journals,
and publications which relate to job duties and responsibilities.
Employee shall first obtain authorization for payment or purchases referred to
in (i) and (ii) from the President of the Company before incurring such costs.
9. Terms of Employment.
(a) Term. The Company hereby agrees to continue the Employee
in its employ, and the Employee hereby agrees to remain in the employ of the
Company, in accordance with the terms and provisions of paragraph 3 of this
Agreement, for the Period of Employment, thus terminating upon the retirement of
the Employee, upon resignation of the Employee, or upon thirty (30) days prior
written notice from the Company to the Employee of termination for cause.
(b) During the Period of Employment. The Employee=s services
shall be performed at the location where the Employee was employed immediately
preceding the Effective Date or at any office which is the headquarters of the
Company.
10. Termination of Agreement.
(a) Termination of Employment by Employer. Anything in this
Agreement to the contrary notwithstanding, the Company shall have the following
rights with respect to termination of Employee=s employment.
(i) Disability. The Company may terminate Employee=s
employment under this Agreement if Employee shall become unable to fulfill his
duties under this Agreement, as measured by the Company=s usual business
activities, by reason of any medically determinable physical and/or mental
disability.
(ii) Cause. Employee=s employment may be terminated
for Cause. For purpose of the Agreement, ACause@ shall mean and refer to a
determination made in good faith by the Company=s Board of Directors that:
(1) Employee has been convicted of or has
entered a plea of guilty or nolo contendere to a felony or to any other crime,
which other crime is punishable by incarceration for a period of one (1) year or
longer, or which is a crime involving moral turpitude;
(2) there has been a theft, embezzlement, or
other criminal misappropriation of funds by Employee, whether from Company or
any other person;
(3) Employee has willfully failed to follow
reasonable written policies or directives established by the Board of Directors
or the Chief Executive Officer of the Company. Additionally, the Employee has
willfully failed to attend to material duties or obligations of Employee=s
office (other than any such failure resulting from Employee=s incapacity due to
physical or mental illness, which is a cause or manifestation of Employee=s
disability), which failure or refusal continues for ninety (90) days following
delivery of a written demand from the Company=s Chief Executive Officer for
performance to Employee identifying the manner in which Employee has failed to
follow such policies or directives or to perform such duties.
(iii) Termination pursuant to this Paragraph 10 shall
be effective as of the effective date of the notice by the Board of Directors,
Chief Executive Officer, or President to Employee that it has made the required
determination, or at such other subsequent date, if any specified in such
notice.
(iv) Death. If Employee dies during the Period of
Employment, Employee=s employment shall be terminated effective as of the end of
the calendar month during which Employee died.
(b) Termination by Employee.
(i) With Good Reason. Employee shall have the right to
terminate his employment under this Agreement at any time for Good Reason,
provided Employee has delivered written notice to the Company which briefly
describes the facts underlying Employee=s belief that AGood Reason@ exist and
the Company has failed to cure such situation within thirty (30) days after the
effective date of such notice. For purposes of the Agreement, AGood Reason@
shall mean and consist of:
(1) a material breach by the Company of its
obligations under this Agreement;
(2) the assignment to Employee of duties
that are materially inconsistent with, or that constitute a material alteration
in the status of his responsibilities set forth in Paragraph 1 of this
Agreement, as an employee of the Company;
(3) a reduction by the Company of Employee=s
Base Salary below the Base Salary set forth in Paragraph 5 (ABase Salary@);
(4) without Employee=s prior written
consent, the transfer or relocation of Employee=s place of employment to any
place other than the Salt Lake City/Provo metropolitan area, except for
reasonable travel on the business of the Company;
(5) upon a change of control as defiend in
Paragraph 6(c) herein, or
(6) upon the consummation of a third party
purchase of a controlling interest of the total outstanding shares of the
Company.
11. Confidential Information. The Employee shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies and
their respective businesses, which has been obtained by the Employee during the
Employee=s employment by the Company or any of its affiliated companies and
which shall not be or become public knowledge (other than by acts by the
Employee or representatives of the Employee in violation of this Agreement).
After termination of the Employee=s employment with the Company, the Employee
shall not, without prior written consent of the Company or as may otherwise be
required by law or legal process, communicate or divulge any such information,
knowledge or data to anyone other than the Company and those designated by the
Company. In no event shall an asserted violation of the provisions of this
Section constitute a basis for deferring or withholding any amounts otherwise
payable to the Employee under the provisions of this Agreement.
12. Inventions.
(a) Assignment. Without further consideration, the Employee
shall fully and promptly report to the Company all writings, ideas, concepts,
inventions, discoveries, formulas, designs, and know-how conceived or produced
by the Employee at any time during the Period of Employment relating to the
Company=s trade or business, whether alone or with others and whether or not
patentable or subject to copy or service rights or trademark or other property
protections (collectively, AInventions@ pertaining directly or indirectly to the
business of the Company as conducted by the Employee at any time during the
Employment Period) and shall assign and hereby does assign to the Company or its
nominee the Employee=s entire right, title and interest in and to all such
Inventions.
4
<PAGE>
(b) Cooperation. The Employee shall take all reasonable action
requested by the Company to protect or obtain title to any and all United States
and/or foreign patents on any such Inventions, including execution and delivery
of all applications, assignments and other documents deemed necessary or
desirable by the Company, provided the Company shall reimburse the Employee for
all expenses incurred by the Employee in connection with such execution and
delivery.
13. Non-Competition after Termination.
(a) Acknowledgment. The Employee acknowledges that his
services and responsibilities are of a particular significance to the Company
and that his position with the Company does and will continue to give him an
intimate knowledge of its business. Because of this, it is important to the
Company that the Employee be restricted from competing with the Company in the
event of the termination of his employment.
(b) Agreement. The Employee agrees that, in addition to any
other limitations, for a period of two (2) years after the termination of his
employment under this Agreement, the Employee will not directly or indirectly
compete with the Company or its business.
14. Severance Pay. Except for termination for Cause under Paragraph
10(a)(iii) herein, if the Employee does not continue in the employ of the
Company during the Period of Employment as provided in this Agreement, whether
or not the Employee is offered continued employment by the Company, Company
shall pay to Employee, no later than 30 days following termination of
employment, the sum of 200% of the then current year=s annual base salary. The
Employee shall not be required to mitigate the amount of the payment provided
for in this section by seeking other employment or otherwise; nor shall the
amount of the payment be reduced by any compensation earned by the Employee as
the result of employment by another employer after termination or otherwise.
15. Indemnification. Subject to the Company's Certificate of
Incorporation, as amended, the Company shall release, indemnify and hold
harmless the Employee against and from any and all loss, claims, actions or
suits, including costs and attorney=s fees, both at trial and on appeal,
resulting from, or arising out of or in any way connected with the Employee=s
acts as an officer of the Company.
5
<PAGE>
16. Miscellaneous. Any notice or other communications required or
permitted to be given to the parties hereto shall be deemed to have been given
when received, addressed as follows (or at such other address as the party
addressed may have substituted by notice pursuant to this Section):
(a) If to the Company:
President and/or Chief Executive Officer
3280 North Frontage Road
Lehi, Utah
Attention: President and CEO
(b) If to Employee:
Steven G. Stewart
187 South 1225 East
Bountiful, Utah 84010
17. Governing Law. This Agreement shall in all respects be interpreted,
construed and governed by and in accordance with the laws of the State of Utah.
Executed this 4th day of January, 1999:
Covol Technologies, Inc.: Employee:
By:______________________________ __________________________
Brent M. Cook Steven G. Stewart
Chief Executive Officer
6
Employment Agreement
THIS EMPLOYMENT AGREEMENT (this "Agreement") is effective as of the first day of
August 1997 (the "Effective Date") by and between Covol Technologies, Inc., a
Delaware corporation (the "Company") and Dee J. Priano ("Employee"). The Company
and Employee are sometimes later in this Agreement collectively referred to as
the "Parties".
RECITALS
This Agreement is entered into with reference to the following facts,
definitions and objectives.
NOW, THEREFORE, in Consideration of this Agreement and of the covenants
contained in this Agreement, the Parties agree as follows:
1) Employment and Position. The Company employs Employee and the Employee
accepts employment by the Company as Vice President of the Company or other
mutually agreed senior position for the Company for the Period of
Employment specified in Paragraph 3, Period of Employment.
2) Services to be Rendered. Employee shall, during the Period of Employment,
serve the Company in the position set forth in Paragraph 1, Employment and
Position, diligently, competently and in conformance with the corporate
policies of the Company. Employee shall be free to conduct real estate
investment activities that do not conflict or interfere with the
performance of his duties under this Agreement. Employee may from time to
time perform services for Kennecott Utah Copper Corporation as long as said
services do not conflict or interfere with the performance of his duties
under this Agreement. In fulfilling his duties and responsibilities under
this Agreement, Employee shall report to the President or Chief Executive
Officer of the Company.
3) Period of Employment. Employee's employment by the Company pursuant to this
Agreement shall, unless sooner terminated as provided in this Agreement, be
for a term of three (3) years, commencing as of the first day of August
1997, and ending with the close of "business" on the thirty-first day of
July 2000 (the "Period of Employment").
4) Base Salary. During the first twenty-four months of this Agreement, the
Employee's regular salary, before all customary and proper taxes, shall be
no less than $80,000 per year, payable bi-weekly. During the last twelve
months of this Agreement, the Employee's regular salary, before all
customary and proper taxes, shall be no less than $125,000 per year,
payable bi-weekly.
1
<PAGE>
5) Incentive Bonus. During the Period of Employment, Employee shall be
entitled to receive bonuses pursuant to the Company's bonus plan as in
effect from time to time.
6) Stock Options. Incentive Stock Options (as defined in Section 422 of the
Internal Revenue Code) shall be issued pursuant and subject to the
provisions outlined below or as otherwise mutually agreed to:
a) Purchase Price. The purchase price per share for the shares
subject to the Stock Option will be Eight Dollars and
Twenty-five Cents ($8.25) per share.
b) Number of Shares. The Stock Options will be for One Hundred
Thousand (100,000) shares of the Company's Common Stock (the
"Optioned Shares").
c) Exercise Periods. Four Thousand (4,000) Optioned Shares will
be vested and exercisable on August 1, 1997 and Four Thousand
(4,000) additional Optioned Shares will be vested and
exercisable on the first day of each month following through
September 1, 1999, at which time all One Hundred Thousand
Optioned Shares will be fully vested and exercisable.
d) Additional Stock Options. Employee shall also be eligible to
receive additional stock options during the Period of
Employment pursuant to a stock option bonus plan as may from
time to time be in effect.
e) Vesting of Options in Event of Disability or Death. In the
event of disability or death of Employee, any nonvested Stock
Options shall vest effective as of the date of the disability
or the death of Employee. In the event of Employee's
disability or death, the Employee, heirs or estate of
Employee, as the case may be, may exercise any unexecuted
options at any time.
f) Vesting of Options in Event of Management Change. In the event
of replacement of Brent M. Cook as Chief Executive Officer of
the Company, all nonvested Stock Options and Additional Stock
Options shall vest as of the date Brent M. Cook is released
from the position of Chief Executive Officer of the Company.
g) Vesting of Options in Event of Ownership Change. In the event
a third party tenders to purchase all outstanding shares of
the Company, or substantially all of the assets of the
Company, all non-vested Stock Options shall vest as of the
date the tender offer or asset sale is announced. The intent
of this section is to allow the Employee to vote the shares
represented by the Stock Options and at the Employee's
discretion, exercise any unexecuted options.
2
<PAGE>
7) Other Benefits. In addition to the benefits previously set forth in this
Agreement, Employee shall, during the Period of Employment, be entitled to
the benefits described below, and as concerns all such benefit programs
where years of service are a factor, to the extent permitted by law,
Employee shall be given credit for his years of service with Kennecott
Corporation and/or any of its subsidiaries.
a) Vacation. During the Period of Employment, Employee shall be
entitled to not less than Five (5) weeks of paid vacation
during each calendar year occurring during the Period of
Employment and that amount of vacation provided to other
senior executive officers of the Company. Upon termination of
Employee's employment under this Agreement, Employee shall be
paid for any unused vacation in the year in which the
termination occurred.
b) Sick Leave. Sick leave time will be granted to the Employee
that is reasonable under the circumstances and that is
consistent with the Company's policies and procedures, as the
same may be changed, modified or terminated for all
participants from time to time.
c) Insurance. At the Employee's option, the Company shall pay the
premium for and provide life, disability, medical, and dental
benefits for the Employee and his family.
d) Retirement Plan. The Employee shall participate in the
Company's Retirement Plans in accordance with the terms and
provisions and applicable law, as the same may be implemented,
changed, amended, or terminated from time to time. Employee
shall become eligible to participate in the Company's
Retirement Plans as of August 1, 1997, or as the effective
date of the implementation of such plans whichever is later.
e) Other Miscellaneous Benefits. The Company shall pay or
reimburse Employee for the following miscellaneous benefits:
i) Annual dues for association membership for relevant
professional groups.
ii) Subscription and purchase of books, journals, and
publications which relate to job duties and
responsibilities.
8) Termination of Employment by the Company. Anytime in this Agreement to the
contrary notwithstanding, the Company shall have the following rights with
respect to termination of the Employee's employment:
a) Cause. Employee's employment may be terminated for Cause. For
purpose of this Agreement, "cause" shall mean and refer to a
determination made in good faith by the Company's Board of
Directors that:
3
<PAGE>
i) Employee has been convicted of or has entered a plea
of guilty or nolo contendre to a felony or to any
other crime, which other crime is punishable by
incarceration for a period of one (1) year or longer,
or which is a crime involving moral turpitude.
ii) There has been a theft, embezzlement, or other
criminal misappropriation of funds by Employee,
whether from Company or any other person.
iii) Employee has willfully failed or refused to follow
reasonable written policies or directives established
by the Board of Directors or the Chief Executive
Officer of the Company, or Employee has willfully
failed to attend to material duties or obligations of
his office (other than any such failure resulting
from Employee's incapacity due to physical or mental
illness which is a cause or manifestation of
Employee's disability), which failure or refusal
continues for thirty (30) days following delivery of
a written demand from the Company's Chief Executive
Officer for performance to Employee identifying the
manner in which Employee has failed to follow such
policies or directives or to perform such duties.
Termination pursuant to this Paragraph shall be
effective as of the effective date of the notice by
the Board of Directors to Employee that it has made
the required determination, or at such other
subsequent date, if any, specified in such notice.
b) Without Cause. Employee's employment may be terminated without
cause provided that the Company pays Employee upon notice of
termination, any unearned salary specified in Paragraph 4,
Base Salary, the amount specified in Paragraph 10, Severance
Pay, any earned Incentive Bonuses specified in Paragraph 5,
Incentive Bonus, vests Employee in any Stock Options specified
in Paragraph 6)b, Stock Options Number of Shares, which have
not vested as of the date of termination and awards to and
vests Employee, effective date of termination, any Additional
Stock Options that Employee has received or is eligible to
receive under Paragraph 6)d, Additional Stock Options.
9) Termination of Employment by Employee. Anytime in this Agreement to the
contrary notwithstanding, the Employee shall have the following rights with
respect to termination of the Employee's employment:
a) With Good Reason. Employee shall have the right to terminate
his employment under this Agreement at any time for Good
Reason, provided Employee has delivered written notice to the
Company which briefly describes the facts underlying
Employee's belief that "Good Reason" exists and the Company
has failed to cure such situation within thirty (30) days
after effective date of such notice. If the employee
terminates With Good Reason, the Company shall pay the
4
<PAGE>
Employee on the date of termination, any unearned salary
specified in Paragraph 4, Base Salary, the amount specified in
Paragraph 10, Severance Pay, any earned Incentive Bonuses
specified in Paragraph 5, Incentive Bonus, vests Employee in
any Stock Options specified in Paragraph 6)b, Stock Options
Number of Shares which have not vested as of the date of
termination and awards to and vests Employee, effective the
date of termination, any Additional Stock Options that
Employee has received or is eligible to receive under
Paragraph 6)d, Additional Stock Options. For purposes of this
Agreement, "Good Reason" shall mean and consist of:
i) A material breach by the Company of its obligations
under this Agreement; without Employee's prior
written consent, the assignment to Employee of duties
that are materially inconsistent with, or that
constitute a material alteration in the status of his
responsibilities set forth in this Agreement, as a
Vice President of the Company; without Employee's
prior written consent, the transfer or relocation of
Employee's place of employment to any place other
than the Salt Lake City/Provo metropolitan area,
except for reasonable travel on the business of the
Company or; upon consummation of a sale of all or
substantially all of the outstanding stock or assets
of the Company in which sale the acquiring company
did not assume all of the obligations of the Company
under this Agreement.
b) Without Good Reason. With not less than sixty (60) days prior
written notice (which notice shall specify the date of
termination), Employee shall have the right to terminate his
employment under this Agreement without Good Reason.
10) Severance Pay. If this Agreement terminates and the Employee does not
continue in the employment of the Company, whether or not the Employee is
offered continued employment by the Company, the Company shall pay to the
Employee an amount equal to two times the base annual salary in effect at
the time of such termination. The Employee shall not be required to
mitigate the amount of the payment provided for in this section by seeking
other employment or otherwise, nor shall the amount of the payment be
reduced by any compensation earned by the Employee as the result of
employment by another employer after termination or otherwise.
5
<PAGE>
11) Automobile Allowance. Commencing January 1, 1999 and continuing until this
Agreement terminates, the Company shall pay the Employee an Automobile
Allowance of no less than $550 per month.
Accepted and Agreed to:
/Dee J. Priano/ 4 January 1999
- ------------------------------------- -------------------------
Dee J. Priano Date
Accepted and Agreed to for Covol Technologies:
/Brent M. Cook/ 4 January 1999
- ------------------------------------- -------------------------
Brent M. Cook Date
6
COVOL TECHNOLOGIES, INC.
List of Subsidiaries
Jurisdiction of
Name Organization
Utah Synfuel #1, Ltd. Delaware limited Partnership
Alabama Synfuel #1, Ltd. Delaware limited Partnership
Flat Ridge Corporation Utah corporation
Commonwealth Synfuel, L.L.C. Utah limited liability company
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Covol Technologies, Inc. on Form S-3 (File No. 333-67371) of our report dated
December 22, 1998, on our audits of the consolidated financial statements of
Covol Technologies, Inc. as of September 30, 1998 and 1997, and for the years
ended September 30, 1998, 1997, and 1996, which report is included in this
Annual Report on Form 10-K.
/PricewaterhouseCoopers LLP/
Salt Lake City, Utah
December 22, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED SEPTEMBER 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 727
<SECURITIES> 0
<RECEIVABLES> 3,891
<ALLOWANCES> 0
<INVENTORY> 1,645
<CURRENT-ASSETS> 38,101
<PP&E> 16,056
<DEPRECIATION> 1,154
<TOTAL-ASSETS> 67,909
<CURRENT-LIABILITIES> 29,552
<BONDS> 14,077
0
1
<COMMON> 11
<OTHER-SE> 21,559
<TOTAL-LIABILITY-AND-EQUITY> 67,909
<SALES> 3,569
<TOTAL-REVENUES> 12,699
<CGS> 9,295
<TOTAL-COSTS> 9,295
<OTHER-EXPENSES> 1,579
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,745
<INCOME-PRETAX> (3,986)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,986)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,986)
<EPS-PRIMARY> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED SEPTEMBER 30,
1997 AND 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1996
<PERIOD-END> SEP-30-1997 SEP-30-1996
<CASH> 4,780 490
<SECURITIES> 0 0
<RECEIVABLES> 1,099 78
<ALLOWANCES> 0 0
<INVENTORY> 1,819 163
<CURRENT-ASSETS> 17,268 779
<PP&E> 6,060 7,528
<DEPRECIATION> 596 403
<TOTAL-ASSETS> 26,870 8,772
<CURRENT-LIABILITIES> 12,308 4,261
<BONDS> 3,389 151
0 0
1 0
<COMMON> 9 8
<OTHER-SE> 5,919 (241)
<TOTAL-LIABILITY-AND-EQUITY> 26,870 8,772
<SALES> 251 195
<TOTAL-REVENUES> 251 295
<CGS> 4,803 860
<TOTAL-COSTS> 4,803 860
<OTHER-EXPENSES> 3,364 8,783
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,645 94
<INCOME-PRETAX> (10,995) (12,932)
<INCOME-TAX> 0 23
<INCOME-CONTINUING> (10,995) (12,955)
<DISCONTINUED> 0 (881)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (10,995) (13,836)
<EPS-PRIMARY> (1.38) (1.99)
<EPS-DILUTED> (1.38) (1.99)
</TABLE>