UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2000
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 0-27808
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)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
The number of shares outstanding of the Registrant's common stock as of May 8,
2000 was 23,415,200.
<PAGE>
COVOL TECHNOLOGIES, INC.
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL INFORMATION (Unaudited):
Consolidated Balance Sheets - As of September 30, 1999
and March 31, 2000......................................... 3
Consolidated Statements of Operations - For the three
months ended March 31, 1999 and 2000 and the six months
ended March 31, 1999 and 2000.............................. 5
Consolidated Statement of Changes in Stockholders'
Equity (Deficit) - For the six months ended March
31, 2000................................................... 6
Consolidated Statements of Cash Flows - For the six
months ended March 31, 1999 and 2000....................... 7
Notes to Consolidated Financial Statements................... 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................. 15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................... 20
ITEM 2. CHANGES IN SECURITIES....................................... 20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................. 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 20
ITEM 5. OTHER INFORMATION........................................... 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 20
SIGNATURES................................................................. 21
Certain statements 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 current expectations. For a discussion
of certain of the factors that could cause actual results to differ from
expectations, please see the information set forth under the caption entitled
"Forward Looking Statements" in PART I, ITEM 2 hereof. There can be no assurance
that Covol's results of operations will not be adversely affected by such
factors. Covol 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>
ITEM 1. CONSOLIDATED FINANCIAL INFORMATION (Unaudited)
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, March 31,
(thousands of dollars) 1999 2000
- ------------------------------------------------------------------------------------------- ---------------- -----------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 461 $ 9,172
Receivables 3,155 8,766
Due from related party 2,722 2,986
Inventories 573 --
Facilities and equipment held for sale 20,139 10,035
Prepaid expenses and other current assets 19 279
Deferred income taxes -- 3,000
---------------- -----------------
Total current assets 27,069 34,238
---------------- -----------------
Property, plant and equipment, net of accumulated depreciation 14,182 3,661
---------------- -----------------
Other assets:
Restricted cash and investments 843 846
Facility-dependent note and accrued interest receivable 7,879 8,365
Facility transferred under note receivable arrangement 2,641 --
Intangible assets, net of accumulated amortization 3,647 1,305
Deposits and other assets 1,834 1,403
---------------- -----------------
Total other assets 16,844 11,919
---------------- -----------------
Total assets $58,095 $49,818
================ =================
</TABLE>
(continued)
The accompanying notes are an integral
part of the consolidated financial statements
3
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, continued
(Unaudited)
September 30, March 31,
(thousands of dollars and shares) 1999 2000
- -------------------------------------------------------------------------------------------- --------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
<S> <C> <C>
Accounts payable $ 1,179 $ 945
Due to related party 2,706 2,915
Accrued interest payable, current 1,452 256
Accrued liabilities 2,905 3,042
Notes payable, current 20,626 11,380
--------------- ----------------
Total current liabilities 28,868 18,538
Long-term liabilities:
Notes payable, non-current 17,887 15,357
Accrued interest payable, non-current 210 --
Deferred revenues from advance license fees 7,501 7,040
Deferred compensation 208 174
--------------- ----------------
Total long-term liabilities 25,806 22,571
--------------- ----------------
Total liabilities 54,674 41,109
--------------- ----------------
Minority interest in consolidated subsidiaries 117 --
--------------- ----------------
Commitments and contingencies (Note 8)
Redeemable convertible preferred stock, $0.001 par value, issued and outstanding 60 shares
at September 30, 1999 and 0 shares at March 31, 2000 4,332 --
--------------- ----------------
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par value; authorized 10,000 shares,
issued and outstanding 17 shares at September 30, 1999 and 55 shares at
March 31, 2000 (aggregate liquidation preference of $7,415 at March 31, 2000) 1 1
Common stock, $0.001 par value; authorized 50,000 shares, issued and outstanding
12,766 shares at September 30, 1999 and 21,701 shares at March 31, 2000 13 22
Capital in excess of par value 78,457 83,626
Accumulated deficit (71,713) (73,541)
Notes and interest receivable - related parties, from issuance of, or collateralized
by, common stock, net of allowance (6,564) (269)
Deferred compensation from stock options (1,222) (1,130)
--------------- ----------------
Total stockholders' equity (deficit) (1,028) 8,709
--------------- ----------------
Total liabilities and stockholders' equity (deficit) $58,095 $49,818
=============== ================
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
4
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31, Six Months Ended March 31,
(thousands of dollars, except per-share data) 1999 2000 1999 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C> <C>
License fees $ 546 $ 4,798 $ 1,247 $ 8,833
Binder sales 423 1,883 956 3,236
Gain on sale of facility -- -- -- 5,341
Gains on non-recurring transactions -- 1,079 -- 1,079
Other 174 139 322 459
-------------------------------------------------------------------
Total revenues 1,143 7,899 2,525 18,948
-------------------------------------------------------------------
Operating costs and expenses:
Cost of coal briquetting operations 2,553 700 6,199 2,289
Cost of binder 274 1,367 650 2,228
Loss on sale of facilities, net -- 598 -- 598
Asset write-offs and other non-recurring charges 556 841 556 11,862
Selling, general and administrative 1,233 1,085 2,162 1,996
Compensation expense from stock options 163 46 325 92
-------------------------------------------------------------------
Total operating costs and expenses 4,779 4,637 9,892 19,065
-------------------------------------------------------------------
Operating income (loss) (3,636) 3,262 (7,367) (117)
-------------------------------------------------------------------
Other income (expense):
Interest income 234 310 990 1,110
Interest expense (1,377) (1,711) (2,413) (3,766)
Write-up (write-down) of notes receivable - related
parties, collateralized by common stock (178) 161 (749) (131)
Other, net (100) 115 (76) 115
-------------------------------------------------------------------
Total other income (expense) (1,421) (1,125) (2,248) (2,672)
-------------------------------------------------------------------
Income (loss) before income taxes and extraordinary item (5,057) 2,137 (9,615) (2,789)
Income tax benefit -- -- -- (3,000)
-------------------------------------------------------------------
Income (loss) before extraordinary item (5,057) 2,137 (9,615) 211
Extraordinary loss on early extinguishment of debt -- (1,823) -- (1,823)
-------------------------------------------------------------------
Net income (loss) $(5,057) $ 314 $(9,615) $(1,612)
===================================================================
Basic and diluted income (loss) per common share $(.41) $.01 $(.80) $(.12)
===================================================================
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
5
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Six Months Ended March 31, 2000
(Unaudited)
Notes and
interest
receivable-
related
parties, from
Convertible issuance of,
Preferred Common or collater- Deferred
Stock Stock Capital alized compensation
(thousands of dollars -------------------------------------- in excess Accumulated by, common from stock
and shares) Shares Amount Shares Amount of par value deficit stock options
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
September 30, 1999 17 $1 12,766 $13 $78,457 $(71,713) $(6,564) $(1,222)
Preferred stock
cash dividends (205)
Common stock issued
on conversion of
redeemable convertible
and convertible
preferred stock and in
payment of dividends -- -- 2,662 3 1,631 (11)
Reclassification of
redeemable convertible
preferred stock to
convertible preferred
stock 38 -- 2,710
Common stock issued
for cash 3,629 4 4,662
Common stock issued
on conversion of
convertible debt 2,540 2 1,114
Common stock issued
in connection with
redemption of 214 -- 256
debt
Common stock issued
for cash and in
connection with
cashless exercise
of warrants 646 1 202
Value of common
stock warrants
issued in connection
with convertible debt
financing -- -- 468
Value of extended
common stock warrants
and repriced stock
options issued in
connection with debt
financing -- -- 70
Cancellation of
notes receivable -
related parties and
common stock
collateralizing the
notes (756) (1) (5,944) 6,164
Write-down of notes
receivable - related
parties 131
Amortization of
deferred compensation
from stock options 92
Net loss for the
six months ended
March 31, 2000 (1,612)
-----------------------------------------------------------------------------------------------------
Balances at
March 31, 2000 55 $1 21,701 $22 $83,626 $(73,541) $(269) $(1,130)
====================================================================================================
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
6
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
----------
Six Months Ended March 31,
(thousands of dollars) 1999 2000
- ------------------------------------------------------------------------------------------------- ----------------- -------------
Cash flows from operating activities:
<S> <C> <C>
Net loss $(9,615) $(1,612)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 845 749
Recognition of deferred revenue from advance license fees (453) (461)
Deferred income taxes -- (3,000)
Gain on sale of facilities, net -- (4,743)
Loss (gain) on disposition of equipment 103 (57)
Gains on non-recurring transactions -- (1,079)
Asset write-offs and other non-recurring charges 556 10,631
Amortization of deferred compensation from stock options 325 92
Interest expense related to amortization of debt discount and debt issuance costs 326 2,272
Extraordinary loss on early extinguishment of debt -- 1,823
Write-down of notes receivable - related parties 749 131
Decrease from changes in operating assets and liabilities (2,688) (6,860)
----------------- -------------
Net cash used in operating activities (9,852) (2,114)
----------------- -------------
Cash flows from investing activities:
Proceeds from sale of facilities and equipment 170 18,089
Purchase of property, plant and equipment and facilities held for sale (323) (551)
Purchase of rights to technology and other assets (128) (75)
Decrease (increase) in restricted cash and in deposits collateralizing letters of credit 50 (3)
Proceeds from facility transferred under note receivable arrangement 261 --
----------------- -------------
Net cash provided by investing activities 30 17,460
----------------- -------------
Cash flows from financing activities:
Proceeds from issuance of notes payable and warrants, net 10,498 2,980
Payments on notes payable, including redemption premiums (4,692) (14,279)
Proceeds from issuance of common stock and warrants, net 3,774 4,666
Proceeds from issuance of preferred stock and warrants, net 6,394 --
Preferred stock dividends -- (205)
Proceeds from exercise of warrants -- 203
----------------- -------------
Net cash provided by (used in) financing activities 15,974 (6,635)
----------------- -------------
Net increase in cash and cash equivalents 6,152 8,711
Cash and cash equivalents, beginning of period 727 461
----------------- -------------
Cash and cash equivalents, end of period $ 6,879 $ 9,172
================= =============
Supplemental schedule of non-cash investing and financing activities:
Cancellation of notes receivable - related parties and the common stock collateralizing $ -- $6,164
the notes
Reclassification of redeemable convertible preferred stock to convertible preferred -- 2,710
stock
Common stock issued on conversion of redeemable convertible and convertible preferred
stock and in payment of dividends 2,159 1,634
Common stock issued on conversion of convertible debt -- 1,116
Common stock issued to purchase minority interests in subsidiaries 519 --
Common stock issued for rights to technology 375 --
Notes payable issued for equipment and rights to technology 640 --
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
7
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
----------
1. Nature of Operations and Basis of Presentation
Covol Technologies, Inc. and its Subsidiaries' ("Covol") primary business
is to commercialize its proprietary binder technologies which are used to
recycle waste by-products from the coal, steel and other industries into
marketable fuel and resources. Through June 1998, Covol's focus was on the
construction of facilities and the licensing of its binder technologies to
entities that constructed facilities that convert coal fines into synthetic
fuel briquettes. Currently, Covol's licensees are operating 28 facilities
in ten states at various levels of production. There are 24 synthetic fuel
plants that utilize Covol's patented technology and four additional
facilities that use an alternative technology that Covol acquired in early
fiscal 1999. During 1999 and 2000, Covol has been actively pursuing the
sale of its four owned facilities and the licensing of its technology to
the buyers, which sales and licensing were completed in August 1999,
December 1999, January 2000 and April 2000, respectively (see Note 5).
Covol has no current plans to construct additional synthetic fuel
facilities.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission for quarterly reports on Form 10-Q. In the opinion of
management, all adjustments considered necessary for a fair presentation
have been included. All adjustments, except the extraordinary loss on early
extinguishment of debt (see Note 2) and the items described in Note 6,
consist of normal recurring adjustments. The results of operations for the
periods presented are not necessarily indicative of the results to be
expected for the full year. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted. It
is suggested that these financial statements be read in conjunction with
the consolidated financial statements and notes thereto included in Covol's
Annual Report on Form 10-K for the year ended September 30, 1999 and in
Covol's Quarterly Report on Form 10-Q for the quarter ended December 31,
1999. Certain prior period amounts have been reclassified to conform with
the current period's presentation. The reclassifications had no effect on
net loss, total assets or total liabilities.
2. Financing and other Equity Transactions
During and subsequent to the quarter ended March 31, 2000, Covol completed
several transactions, including the following.
Convertible Debt
In January 2000, Covol redeemed all of the convertible debt issued from
September 1999 through December 1999. The redemption consideration given
included approximately $1,000,000 in redemption premiums plus approximately
214,000 shares of common stock. The loss recognized as a result of the
redemption consideration paid plus the acceleration of amortization of the
unamortized debt discount and debt issuance costs totaled approximately
$1,823,000. This loss is reflected as an extraordinary item in the
Consolidated Statements of Operations as required by generally accepted
accounting principles ("GAAP").
In April 2000, Covol and the holder of the $20,000,000 convertible debt
amended the terms of the convertible secured note. The revised terms call
for i) a change in the due date to September 2001, and ii) changes in the
provisions for early redemption, including a reduction in the amount of the
cash required to be paid upon early redemption, and new mandatory
redemption requirements upon the receipt by Covol of certain deferred
payments from the sales of synthetic fuel facilities which occurred in
August 1999 and January 2000 (see Note 5). In connection with this
amendment, Covol was required to redeem $3,000,000 of the face value of the
debt in April 2000 and $2,000,000 in May 2000, resulting in an
extraordinary loss of approximately $2,600,000. Also, Covol was allowed to
redeem the preferred stock held by this entity (see Preferred Stock on the
following page).
Notes Payable
In February 2000, Covol restructured its outstanding debt associated with
the construction of a wash plant (see Note 3). The creditor, which is a
limited partner of Coaltech, agreed to accept Covol's note receivable from
Coaltech (classified
8
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
----------
as "Facility transferred under note receivable arrangement" in the
Consolidated Balance Sheet) as partial payment on the debt. The outstanding
principal and accrued interest, totaling approximately $4,927,000, was
reduced to a remaining balance of approximately $1,962,000 ($1,927,000 at
March 31, 2000) and the due date of the restructured note was extended to
October 2000. A gain of approximately $324,000 was recognized on this
transaction, which amount represents the interest on the note receivable
that, as required by GAAP, had not been previously recognized.
In April 2000, the holder of the $3,000,000 14% note payable described in
Note 3 converted $2,000,000 of principal into approximately 1,186,000
shares of common stock and warrants for the purchase of approximately
296,000 shares of common stock. The due date for the remaining $1,000,000
of principal was extended to April 2001. The warrants are exercisable
through April 2005 at a price of $2.10 per share. In connection with this
transaction, the creditor released as collateral a promissory note
receivable reflected as "Note receivable - related party" in stockholders'
equity in the March 31, 2000 Consolidated Balance Sheet. The promissory
note requires an annual payment to Covol of approximately $515,000 with the
outstanding balance of approximately $3,700,000 due January 2005.
Preferred Stock
During the quarter ended March 31, 2000, 7,257 shares of series D
redeemable convertible preferred stock were converted into approximately
878,000 shares of common stock. In March 2000, an amendment was made to
Covol's Series D Preferred Stock Agreement eliminating the provisions that
in certain situations allowed the holder to require Covol to redeem the
preferred stock. Accordingly, this preferred stock is classified as a
component of stockholders' equity at March 31, 2000. In April 2000, an
additional 1,910 shares of series D convertible preferred stock were
converted into approximately 150,000 shares of common stock.
Also in April 2000, an agreement was entered into with the holder of the
series D preferred stock, which entity also holds the $20,000,000 face
value convertible debt. The agreement provided for the redemption of 16,000
shares of the outstanding preferred stock, which redemption occurred in
April 2000. In May 2000, the remaining 19,631 shares of preferred stock
were redeemed. The total amount paid for both redemptions was approximately
$4,454,000, including a redemption premium of approximately $891,000.
Common Stock
In March 2000, Covol issued approximately 3,629,000 shares of common stock
for cash proceeds of approximately $4,666,000, net of cost of approximately
$270,000. Subsequent to March 31, 2000, Covol issued approximately 379,000
shares of common stock and warrants for the purchase of approximately
133,000 shares of common stock to certain officers and directors for net
cash proceeds of approximately $592,000. The warrants are exercisable
through March 2005 at a price of $1.56 per share.
Notes and Interest Receivable - Related Parties
In March 2000, Covol entered into termination agreements with certain
current and former officers and employees having notes and interest payable
to Covol totaling approximately $6,164,000. All of these notes were
collateralized by shares of Covol's common stock and were classified as a
reduction in stockholders' equity. The agreements called for the
cancellation of the outstanding balances under the notes, including
interest, in exchange for the surrender and cancellation of the outstanding
shares of common stock collateralizing the notes. These transactions
resulted in the cancellation of approximately 756,000 shares of common
stock and the recognition of a loss of approximately $219,000, which amount
represents the interest recognized on the notes in prior periods.
Warrants
During the quarter ended March 31, 2000, the terms of existing warrants for
the purchase of approximately 2,750,000 shares of common stock at exercise
prices ranging from $3.50 to $12.00 per share were changed. The revised
terms of the warrants reduced the shares issuable under these warrants to
approximately 620,000 shares of common stock with a corresponding reduction
in the exercise price to $1.32 per share. During the quarter, warrants for
the purchase of approximately
9
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
----------
213,000 shares of common stock were exercised for cash proceeds of
approximately $203,000. Also during the quarter, approximately 433,000
shares of common stock were issued in a cashless exercise of warrants. As
of March 31, 2000, warrants for the purchase of approximately 766,000
shares of common stock were outstanding, with exercise prices ranging from
$1.32 to $3.84 per share. Additional warrants were issued subsequent to
March 31, 2000, as described in preceding paragraphs.
3. Notes Payable
Notes payable consist of the following:
<TABLE>
<CAPTION>
September 30, March 31,
(thousands of dollars) 1999 2000
---------------------------------------------------------------------------------------------- -------------- ---------------
<S> <C> <C>
Note payable to a corporation, bearing interest at 6%, collateralized by a coal wash plant
in Utah, principal and interest due October 2000, as described in Note 2. $ 4,313 $ 1,927
Note payable to the same corporation referred to in the preceding paragraph, bearing
interest at prime, repaid in December 1999 (see Note 5). 2,900 --
Note payable to the same corporation referred to in the preceding two paragraphs, bearing
interest at 6%, repaid in January 2000 (see Note 5). 6,500 --
Note payable to a limited liability company, bearing interest at 10%, repaid in April 2000
(see Note 5). 9,191 8,994
Convertible secured note payable to an investment company, issued at a discount,
bearing a stated interest rate of 2.5% on the $20,000 face amount. The note, as amended,
is due September 2001, but is expected to be redeemed earlier by Covol (see Note 2).
Interest is payable semiannually on January 1 and July 1. The note is collateralized by
license fees payable to Covol from the production and sale of synthetic fuel from five
synthetic fuel facilities. 10,265 11,978
Convertible secured note payable to a Covol shareholder, issued at a discount, bearing a
stated interest rate of 8%. This note, which increased in amount in October 1999,
along with another convertible note payable to an unrelated entity issued in December
1999, were redeemed by Covol in January 2000, as described in Note 2. 622 --
Note payable to a corporation, bearing interest at 14% payable monthly. $1,000 of principal
was paid in January 2000. The remaining principal was originally due April 2000, but in
April 2000, $2,000 was converted into shares of common stock and warrants for the
purchase of common stock and $1,000 was extended and is now due April 2001, as described
in Note 2. The note is collateralized by future license fees payable to Covol from the
production and sale of synthetic fuel from two synthetic fuel facilities. A member of
Covol's Board of Directors is affiliated with this corporation. 4,000 3,000
Other 722 838
-------------- ---------------
38,513 26,737
Less: current portion (20,626) (11,380)
-------------- ---------------
Total non-current $17,887 $15,357
============== ===============
</TABLE>
A substantial portion of facilities and equipment held for sale and license
fees from the production and sale of synthetic fuel from approximately 50% of
the licensed synthetic fuel facilities are collateral for notes payable. The
weighted average interest rate on notes payable was 7.9% at September 30,
1999 and March 31, 2000.
10
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
----------
4. Basic and Diluted Earnings per Share
<TABLE>
<CAPTION>
Three Months Ended March 31, Six Months Ended March 31,
(thousands of dollars and shares, except per-share data) 1999 2000 1999 2000
---------------------------------------------------------- -------------- --------------- --------------- ---------------
Numerator:
<S> <C> <C> <C> <C>
Income (loss) before extraordinary item $(5,057) $ 2,137 $(9,615) $ 211
Extraordinary item -- (1,823) -- (1,823)
-------------- --------------- --------------- ---------------
Net income (loss) (5,057) 314 (9,615) (1,612)
Preferred stock dividends (undeclared) (77) (119) (137) (265)
Imputed preferred stock dividends (40) -- (40) (58)
-------------- --------------- --------------- ---------------
Numerator for basic earnings per share -- net income
(loss) attributable to common stockholders (5,174) 195 (9,792) (1,935)
Effect of dilutive securities - preferred stock dividends -- 72 -- --
-------------- --------------- --------------- ---------------
Numerator for diluted earnings per share -- net income
(loss) attributable to common stockholders after assumed
conversions $(5,174) $ 267 $(9,792) $(1,935)
============== =============== =============== ===============
Denominator:
Denominator for basic earnings per share --
weighted-average shares outstanding 12,472 18,025 12,224 15,818
Effect of dilutive securities:
Shares issuable upon exercise of warrants -- 337 -- --
Shares issuable upon conversion of preferred stock -- 8,009 -- --
-------------- --------------- --------------- ---------------
Total dilutive potential shares -- 8,346 -- --
-------------- --------------- --------------- ---------------
Denominator for diluted earnings per share --
weighted- average shares outstanding after assumed
exercises and conversions 12,472 26,371 12,224 15,818
============== =============== =============== ===============
Basic earnings per share:
Income (loss) before extraordinary item $(.41) $.11 $(.80) $(.01)
Extraordinary item -- (.10) -- (.11)
-------------- --------------- --------------- ---------------
Net income (loss) per common share $(.41) $.01 $(.80) $(.12)
============== =============== =============== ===============
Diluted earnings per share:
Income (loss) before extraordinary item $(.41) $.08 $(.80) $(.01)
Extraordinary item -- (.07) -- (.11)
-------------- --------------- --------------- ---------------
Net income (loss) per common share $(.41) $.01 $(.80) $(.12)
============== =============== =============== ===============
</TABLE>
During the quarter ended March 31, 2000, Covol's potentially dilutive
securities consisted of options and warrants for the purchase of common
stock, three convertible debt issues and three series of convertible
preferred stock. Only the warrants and the series D convertible preferred
stock, all of which was redeemed in April and May 2000 (see Note 2), were
dilutive. For the quarter ended March 31, 2000, all other potentially
dilutive securities were anti-dilutive. For all other periods, all other
potentially dilutive securities were anti-dilutive and were not considered
in the calculation of diluted earnings per share.
5. Sale of Facilities
Covol's business plan called for the construction and sale of synthetic fuel
manufacturing facilities and the licensing of Covol's technology to facility
purchasers to generate ongoing royalties. In December 1999, Covol sold one
of the three remaining synthetic fuel facilities it owned. This facility was
located in Price, Utah. Covol reported a gain on this transaction of
approximately $5,341,000. Covol will sell proprietary binder material used
at the facility and will receive an ongoing royalty based upon production
and sale of synthetic fuel from this facility. Net cash proceeds to Covol,
after payment of construction debt and certain other obligations, were
approximately $5,500,000.
In January 2000, Covol sold a synthetic fuel facility located in North Fork,
West Virginia and an option to acquire a licensee facility located in
Nevada, to a major U.S. utility. Combined net cash proceeds to Covol after
payment of related
11
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COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
----------
debt and other obligations were approximately $1,500,000. Covol reported a
combined loss on these transactions of approximately $598,000. Both
facilities are being relocated and additional net cash proceeds, totaling
approximately $6,500,000, are due to Covol when the two facilities reach
commercial operation at the new location, at which time $6,500,000 will be
recognized as revenue. Covol will sell proprietary binder material used at
both facilities and will receive future royalties based upon production and
sale of synthetic fuel at the facilities.
In April 2000, Covol sold its remaining owned synthetic fuel facility,
located in Tallmansville, West Virginia. Net cash proceeds to Covol, after
payment of related debt and other obligations were approximately $300,000.
Covol will report a gain on this transaction of approximately $1,200,000.
Covol will also sell proprietary binder material used at the facility and
will receive an ongoing royalty based upon production and sale of synthetic
fuel from this facility.
In addition to the subsequent payments receivable upon relocation and
commercial operation of the facilities sold in January 2000, Covol can
receive additional cash payments from the August 1999 sale of a synthetic
fuel facility in the form of both accelerated and increased royalties.
These payments, totaling up to approximately $9,000,000 are receivable upon
obtaining firm synthetic fuel "off-take" agreements and by meeting
specified operating performance criteria. Covol must achieve some of the
performance milestones by June 30, 2000 and others prior to December 31,
2001. Covol will recognize revenue under the royalty arrangement upon
receipt of the royalty payments and upon achievement of performance
milestones.
Under the terms of the April 2000 amendment to the convertible secured note
agreement (see Note 2), Covol is required to pay approximately 80% of the
cash received from subsequent payments related to the August 1999 and
January 2000 sales of synthetic fuel facilities to the debtholder to redeem
any outstanding balances of convertible debt.
6. Gains on Non-recurring Transactions and Asset Write-offs and Other
Non-recurring Charges
During the quarter ended March 31, 2000, Covol recorded non-recurring gains
of approximately $1,079,000 related to the satisfaction of a contingent
contract liability (see Note 8) and the gain recognized on the Coaltech
note receivable transaction described in Note 2.
Covol recorded in the December 1999 quarter an impairment charge of
approximately $10,300,000 related to assets located in Price, Utah. This
impairment charge consisted of an approximate $8,100,000 writedown to net
realizable value of certain plant and equipment which remains on the site
and is now idle, plus an approximate $2,200,000 writeoff of an intangible
asset which was no longer considered recoverable due to the relocation of
the Coaltech facility. Covol recorded other asset write-offs and
non-recurring charges in the quarter ended December 31, 1999 which, when
added to the impairment charge, totaled approximately $11,021,000. Of this
amount, approximately $10,412,000 represented a non-cash charge. In the
March 2000 quarter, Covol recorded additional non-recurring employee
severance and other settlement charges totaling approximately $841,000, of
which $219,000 represented a non-cash charge.
7. Income Taxes
In the quarter ended December 31, 1999, Covol recognized $3,000,000 of its
deferred tax asset. Covol believes it is more likely than not that this
portion of its total deferred tax assets will be realized as a result of
income resulting from the sales in January 2000 of a synthetic fuel
facility and an option to acquire a synthetic fuel facility. Covol did not
recognize any income tax expense in the quarter ended March 31, 2000 due to
available net operating loss carryforwards.
8. Commitments and Contingencies
Commitments and contingencies as of March 31, 2000 not disclosed elsewhere,
are as follows.
Included in accrued liabilities at September 30, 1999 is $755,000 related
to canceled construction contracts that contained a "failure to proceed"
liability clause. This contingent liability was satisfied at no cost in
March 2000.
In March 1997, Covol transferred the Utah Synfuel #1 facility to Coaltech.
In connection with this transaction, Covol licensed Coaltech to use Covol's
proprietary binder technologies for a non-refundable advance license fee of
$1,400,000,
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<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
----------
which is being recognized as income through 2007, the contractual term of
the license agreement, and a recurring license fee that is payable
quarterly and that is based upon synthetic fuel produced and sold at the
Coaltech facility. Covol contracted with Coaltech to operate the facility
for which Covol received a quarterly fee, which was also based upon
synthetic fuel produced and sold. The limited partners of Coaltech have an
option wherein they can require Covol to repurchase this facility under
certain conditions. This put option can be exercised if 1) none of the
limited partners are able 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, the option price is $10. In accordance with generally
accepted accounting principles and after discussions with the staff of the
Securities and Exchange Commission, this transaction was not reflected as a
sale for accounting purposes. The original cost of the facility less cash
payments received from Coaltech, was reflected in the consolidated balance
sheet as of September 30, 1999 as facility transferred under note
receivable arrangement. As described in Note 2, this asset was realized in
February 2000 in connection with the reduction of the amount due under a
note payable to one of the limited partners of Coaltech.
Additionally, Covol entered into a supply and purchase agreement with
Coaltech wherein Covol agreed to provide to Coaltech coal fines for
processing into synthetic fuel at a price equal to Covol's cost. Covol
agreed to purchase from Coaltech the synthetic fuel produced, at Coaltech's
cost plus one dollar per ton. As a result of this commitment to purchase
Coaltech's production, Covol experienced significant losses related to the
write-down of the synthetic fuel purchased to the lower of cost or market.
This write-down historically approximated 90% of the amount Covol paid for
the synthetic fuel.
In anticipation of a relocation of the Utah facility by Coaltech, on
October 29, 1999 Covol received notification from the limited partners of
Coaltech that they were effecting a retirement of Covol as the general
partner of the partnership and were terminating Covol as operator of the
Utah facility. The limited partners also assert that as a consequence of
the retirement of Covol as general partner, Covol is deemed to have
forfeited its 1% interest in the partnership. The notification demands that
Covol indemnify the limited partners for all of their losses, damages,
payments, costs and expenses. Covol disputes the limited partners' demands.
On December 1, 1999, the parties entered into negotiations and as a result
an interim standstill agreement was reached pursuant to which the limited
partners and Covol have agreed not to pursue formal proceedings against
each other pending the outcome of the current settlement negotiations. As
more fully described in Note 2, in February 2000, Covol, Coaltech and one
of the limited partners of Coaltech reached a settlement regarding both the
note payable due to the limited partner from Covol and the note receivable
due to Covol from Coaltech. It is likely that the ultimate outcome of these
negotiations will result in relocation of the Utah facility to a new site
and termination of contractual and operational activities between Covol and
the limited partners with settlement payments materially consistent with
amounts reflected in the accompanying consolidated financial statements. It
is also expected that the limited partners will continue to purchase
proprietary binder materials from Covol and use Covol's technology in the
production of synthetic fuel when operations of the facility are resumed.
In June 1996, Covol formed Alabama Synfuel #1, Ltd. to construct a
synthetic fuel facility. In connection with the construction of this
facility, Covol entered into a supply agreement for coal fines to be used
at the facility. Covol assigned this agreement to the purchaser of the
facility and accordingly, has no ongoing obligation. Covol has been paid
for the coal fines sold to the facility purchaser, but has a dispute with
the provider of the coal fines for a portion of the coal fines Covol paid
for. The resolution of this dispute is not expected to have a material
impact on Covol.
In September 1996, Covol entered into an agreement with Coalco Corporation
whereby Coalco was to advise Covol with respect to the financing and sale
of certain synthetic fuel manufacturing facilities. A dispute arose between
Covol and Coalco about services rendered or to be rendered by Coalco and
the amount and timing for payment for such services. A settlement was
reached in November 1999 whereby Covol agreed to pay Coalco $1,500,000 plus
a royalty based on the synthetic fuel sold from five licensee-owned
facilities. Of the $1,500,000 to be paid, $469,000 was accrued as of
September 30, 1999 and was paid in November 1999. An additional $901,000
has been paid through March 31, 2000 resulting in an unpaid balance of
$130,000. Pelletco, an affiliate of Coalco, is a licensee of Covol.
In March 1999, Covol entered into a financing transaction involving the
issuance of convertible preferred stock and a convertible secured note (see
Note 3). The transaction requires, among other things, (i) stockholder
approval of the
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<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
----------
transaction, (ii) registration of common stock into which the securities
issued may be converted, and (iii) achievement of earnings targets
beginning in the first quarter of Covol's fiscal year 2000. The transaction
was approved in Covol's stockholder meeting held in February 2000. Covol
filed the required registration statement on Form S-3 covering the March
1999 financing transaction and such registration statement was declared
effective. Also, the earnings targets have been met through March 31, 2000.
Failure to comply with the terms and conditions of these financing
agreements could result in an increase in the interest rate, immediate
convertibility, required escrow payments and possible immediate payment of
outstanding amounts.
Covol may incur costs associated with relocation of the synthetic fuel
facility sold in April 2000. The costs to be paid by Covol, currently
estimated to be approximately $300,000, will reduce the net proceeds and
the gain recognized on the sale of the facility.
In February 1997, Covol entered into a contract with Earthco regarding a
parcel of real property located near Price, Utah, in which Covol obtained
certain possessory and related interests, Covol's primary purpose being to
obtain a source of coal fines to serve as feedstock for a nearby synthetic
fuel facility. In August 1999, Covol sent a notice of default to Earthco,
alleging that Earthco had breached a material provision of the contract
because Earthco did not have title to the property. Covol has refused to
tender its August 1999 payment and subsequent payments because of Earthco's
breach. In addition, Covol contends that the quantity and/or quality of
recoverable coal fines was substantially less than what Covol had
understood when entering into the contract, thereby creating grounds to
reform the terms of the contract. Earthco subsequently countered with
allegations that Covol has breached its obligations under the contract,
including failure to make the August 1999 payment.
In November 1999, Covol was served with a Complaint in litigation pending
in the Seventh Judicial District Court of Carbon County, Utah titled Nevada
Electric Investment Company v. Earthco, et al. In the Complaint, Nevada
Electric Investment Company ("NEICO") alleges that it is the lawful owner
of the property near Wellington, Utah described in Covol's lease from
Earthco. NEICO seeks a declaratory judgement that Covol is not entitled to
possession of the property due to the lack of ownership by Earthco. The
Complaint also seeks further relief from Earthco. Covol received Earthco's
Answer, Counterclaims and Cross-claim in December 1999. Earthco's
cross-claim against Covol alleged breach of contract and requested
substantial damages in an amount to be proven at trial but alleged to be in
excess of $5,000,000. Covol filed its Reply and Cross-claim against Earthco
in January 2000 denying Earthco's claims and asserting claims of
misrepresentation, breach of lease, unjust enrichment, and related claims
and for general and consequential damages in an amount to be proven at
trial. The disputes among Covol, Earthco and NEICO are at an early stage
and resolution is uncertain. Covol intends to defend against claims and
prosecute its own claims vigorously.
During the six months ended March 31, 2000, Covol recorded approximately
$6,800,000 of license fee revenues from a single licensee that owns four
synthetic fuel facilities that use Covol's proprietary binder technology.
These revenues relate to sales of synthetic fuel at these facilities
primarily between June 1999 and March 2000 which were recently reported by
this licensee. Covol and this licensee agreed to amend the license fee
arrangements for prior and future periods and the Consolidated Financial
Statements reflect these amended terms. In addition, the future interest
rate on the $6,500,000 note receivable from this licensee will be reduced
from 12% to 6% effective on the date of the formal agreement which is
expected to be in May 2000.
In January 2000, Covol received a letter from Nasdaq informing Covol that
it may not meet continued listing requirements of The Nasdaq Stock Market.
Following Covol's response, Nasdaq sent another letter notifying Covol that
its listing would be continued subject to Covol meeting certain conditions
on or before March 31, 2000. These conditions were met and Nasdaq notified
Covol that it meets all Nasdaq listing requirements.
Covol is also involved in several legal proceedings that have arisen out of
the normal course of business. Covol believes that many of these claims are
without merit and in all cases intends to vigorously defend its position.
Management does not believe that the outcome of these activities will have
a significant effect upon the operations or the financial position of
Covol.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis should be read in conjunction
with the accompanying unaudited consolidated financial statements and notes
thereto.
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
Revenues. Total revenues for the three months ended March 31, 2000 ("2000")
increased by $6,756,000 to $7,899,000 as compared to $1,143,000 for the three
months ended March 31, 1999 ("1999"). During 2000, Covol recognized license fees
totaling $4,798,000 while $546,000 of license fees were recognized during 1999.
The license fees in 2000 consisted of the straight-line amortization of
one-time, non-refundable initial license fees of $231,000 and recurring earned
license fees or royalty payments of $4,567,000. License fees in 1999 consisted
of the straight-line amortization of one-time, non-refundable initial license
fees of $226,000 and recurring license fees or royalty payments of $320,000.
Initial license fees are not expected to increase in future periods and are
recognized on a straight-line basis over the period covered by Covol's license
agreements with licensees. Recurring earned license fees or royalty payments,
which over the long term are expected to increase in future periods, are due
quarterly based upon synthetic fuel produced and sold as reported to Covol by
its licensees. The increase in 2000 earned license fees was due primarily to
significant increases from a licensee that owns and operates four synthetic fuel
facilities (see Note 8 to the Consolidated Financial Statements).
Covol provides proprietary 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. Binder sales
during 2000 were $1,883,000 with a corresponding direct cost of $1,367,000.
Binder sales during 1999 were $423,000 with a corresponding direct cost of
$274,000. The increase in binder sales in 2000 over 1999 was due to increased
synthetic fuel production by Covol's licensees.
Gains on Non-recurring Transactions. In 2000, Covol recorded non-recurring gains
of approximately $1,079,000 related to the satisfaction of a contingent contract
liability for $755,000 (see Note 8 to the Consolidated Financial Statements) and
the gain recognized on the Coaltech note receivable transaction described in
Note 2 to the Consolidated Financial Statements.
Operating Costs and Expenses. Operating costs and expenses decreased by $142,000
to $4,637,000 during 2000 from $4,779,000 during 1999. Cost of operations
decreased $1,853,000 from $2,553,000 during 1999 to $700,000 during 2000. During
2000, Covol incurred significantly lower operating expenses in connection with
the continued refinement and implementation of the briquetting process
associated with the 24 facilities placed in service during 1998, and in
particular the operating costs associated with the four facilities owned by
Covol which have now been sold. Consistent with its business plan to sell the
facilities and earn royalties from facility buyers, Covol sold its four owned
facilities in August 1999, December 1999, January 2000 and April 2000,
respectively (see Note 5 to the Consolidated Financial Statements). In 1999,
cost of operations primarily related to labor and operating expenses at the
owned synthetic fuel facilities and the wash plant located in Utah, losses
related to the writedown of inventory purchased from Coaltech, and costs
incurred in providing assistance to Covol's licensees in resolving ramp-up
issues at their synthetic fuel facilities. Covol expects the cost of operations
to continue to decrease in 2000 as compared to 1999 levels.
Loss on Sale of Facilities. In 2000, Covol sold a synthetic fuel facility and an
option to acquire a licensee facility. Covol reported a combined loss on these
transactions of approximately $598,000. Both facilities are being relocated and
additional net cash proceeds, totaling approximately $6,500,000, are due to
Covol when the two facilities reach commercial operation at the new location, at
which time $6,500,000 will be recognized as revenue (see Note 5 to the
Consolidated Financial Statements).
Asset write-offs and other non-recurring charges. In 2000, Covol recorded
non-recurring employee severance and other settlement charges totaling
approximately $841,000, compared to non-recurring charges of $556,000 in 1999.
Selling, general and administrative expenses decreased $148,000 or 12% to
$1,085,000 during 2000 from $1,233,000 for 1999. The largest components of
selling, general and administrative expenses for both periods were payroll,
professional services and travel expenses. Payroll costs increased approximately
$60,000; professional services, primarily legal, increased approximately
$120,000; and travel expenses decreased approximately $100,000 from 1999 to
2000. There were significant decreases in most of the other selling, general and
administrative expenses from 1999 to 2000 which more than offset the net
increase in the three major expense categories.
Compensation expense from stock options decreased $117,000 to $46,000 for 2000
from $163,000 for 1999. This expense relates to options granted in prior periods
that vest over several years and the compensation value that is being recognized
as
15
<PAGE>
an expense over the vesting period. During the fiscal year ended September 30,
1999, Covol terminated several employees to whom compensatory stock options were
granted in prior years. These stock options were not forfeited upon termination,
resulting in the write off of the unamortized deferred compensation related to
these individuals. As a result of the write-off, amortization expense decreased.
Other Income and Expense. During 2000, Covol reported net other expenses of
$1,125,000 compared to $1,421,000 for 1999. This decrease of $296,000 relates to
a negative variance in interest expense of $334,000, offset by positive
variances between periods of $339,000 in the mark-to-market adjustment of the
carrying value of a related party note receivable collateralized by Covol common
stock and $291,000 in interest income and other income.
Interest expense increased in 2000 due primarily to the higher effective cost of
debt which existed in 2000 as compared to 1999, most notably as a result of the
convertible debt issued at a discount during March 1999. Interest expense of
$1,122,000 in 2000 resulted from the amortization of debt discount and debt
issuance costs, while only $244,000 of interest expense in 1999 consisted of
amortization of debt discount and debt issuance costs. Interest expense is
expected to decrease in the future as a result of repayment of debt related to
the sale of company-owned facilities in late 1999 and 2000 and the redemption of
convertible debt in January 2000, as well as other debt payoffs.
During 1996, Covol sold certain construction companies and received as
consideration a $5,000,000 note receivable ("Note"). The Note is "marked to
market" each quarter based upon the market value of Covol's common stock held as
collateral and is reflected in the consolidated balance sheet at the underlying
value of this collateral, $269,000 at March 31, 2000. This adjustment resulted
in a write-up of $161,000 during 2000, compared to a write-down of $178,000
during 1999, for a variance of $339,000.
Extraordinary Item. In January 2000, Covol redeemed all of the convertible debt
issued from September 1999 through December 1999. The redemption consideration
given included approximately $1,000,000 in redemption premiums plus
approximately 214,000 shares of common stock. The loss recognized as a result of
the redemption consideration paid plus the acceleration of amortization of the
unamortized debt discount and debt issuance costs totaled approximately
$1,823,000. This loss is reflected as an extraordinary item in the Consolidated
Statements of Operations.
Net Income. For 2000, net income of $314,000 represents a change of $5,371,000
from the net loss of $5,057,000 in 1999. This is primarily due to increased
revenues, especially license fees, and the reduction in cost of operations,
offset by the increase in interest expense. Covol did not recognize any income
tax expense in 2000 due to available net operating loss carryforwards. No income
tax benefit was recognized in 1999 since the realization of the deferred tax
asset, consisting primarily of net operating loss carryforwards, is dependent on
generation of future taxable income.
Six Months Ended March 31, 2000 Compared to Six Months Ended March 31, 1999
Revenues. Total revenues for the six months ended March 31, 2000 ("2000")
increased by $16,423,000 to $18,948,000 as compared to $2,525,000 for the six
months ended March 31, 1999 ("1999"). During 2000, Covol recognized license fees
totaling $8,833,000 while $1,247,000 of license fees were recognized during
1999. The license fees in 2000 consisted of the straight-line amortization of
one-time non-refundable initial license fees of $461,000 and recurring earned
license fees or royalty payments of $8,372,000. License fees in 1999 consisted
of the straight-line amortization of one-time non-refundable initial license
fees of $453,000 and recurring license fees or royalty payments of $794,000. The
increase in 2000 earned license fees was due primarily to significant increases
from a licensee that owns and operates four synthetic fuel facilities (see Note
8 to the Consolidated Financial Statements). Binder sales during 2000 were
$3,236,000 with a corresponding direct cost of $2,228,000. Binder sales during
1999 were $956,000 with a corresponding direct cost of $650,000. The increase in
binder sales in 2000 over 1999 was due to increased synthetic fuel production by
Covol's licensees.
Gain on sale of facility. In December 1999, Covol sold one of the remaining
synthetic fuel facilities it owned. This facility was located in Price, Utah.
Covol reported a gain on this transaction of approximately $5,341,000. There
were no sales of synthetic fuel facilities in fiscal 1999, however Covol sold a
facility and an option to acquire a facility in January 2000 on which a combined
loss was recognized (see Note 5 to the consolidated financial statements).
Gains on Non-recurring Transactions. In 2000, Covol recorded non-recurring gains
of approximately $1,079,000 related to the satisfaction of a contingent contract
liability for $755,000 (see Note 8 to the Consolidated Financial Statements) and
the $324,000 gain recognized on the Coaltech note receivable transaction
described in Note 2 to the Consolidated Financial Statements.
16
<PAGE>
Operating Costs and Expenses. Operating costs and expenses increased by
$9,173,000 to $19,065,000 during 2000 from $9,892,000 during 1999, primarily due
to non-recurring charges of approximately $11,862,000 in 2000. Cost of
operations decreased $3,910,000 from $6,199,000 during 1999 to $2,289,000 during
2000. During 2000, Covol incurred significantly lower operating expenses in
connection with the continued refinement and implementation of the briquetting
process associated with the 24 facilities placed in service during 1998, and in
particular the operating costs associated with the four facilities owned by
Covol which have now been sold. In 1999, cost of operations primarily related to
labor and operating expenses at the owned synthetic fuel facilities and the wash
plant located in Utah, losses related to the writedown of inventory purchased
from Coaltech, and costs incurred in providing assistance to Covol's licensees
in resolving ramp-up issues at their synthetic fuel facilities. Covol expects
the cost of operations to continue to decrease in 2000 as compared to 1999
levels.
Loss on Sale of Facilities. In 2000, Covol sold a synthetic fuel facility and an
option to acquire a licensee facility. Covol reported a combined loss on these
transactions of approximately $598,000 (see Note 5 to the Consolidated Financial
Statements).
Asset write-offs and other non-recurring charges. Coaltech owns a synthetic fuel
facility which is located on the same property as the facility that was sold by
Covol in December 1999. As a result of the anticipated relocation of the
facility owned by Coaltech, combined with the sale and relocation of Covol's
owned facility, all of which relate to the same property site in Price, Utah
(see Notes 5 and 8 to the Consolidated Financial Statements), Covol recorded in
the December 1999 quarter an impairment charge of approximately $10,300,000.
This impairment charge consisted of an approximate $8,100,000 writedown to net
realizable value of certain plant and equipment which remains on the site and is
now idle, plus an approximate $2,200,000 write-off of an intangible asset which
was no longer considered recoverable due to the relocation of the Coaltech
facility.
Covol recorded additional non-recurring employee severance and other settlement
charges in 2000 which, when added to the charges described in the preceding
paragraph, totaled approximately $11,862,000. Of this amount, approximately
$10,631,000 represented a non-cash charge. In 1999, Covol recorded non-recurring
charges of approximately $556,000.
Selling, general and administrative expenses decreased $166,000 or 8% to
$1,996,000 during 2000 from $2,162,000 for 1999. The largest components of
selling, general and administrative expenses for both periods were payroll,
professional services and travel expenses. Payroll costs increased approximately
$130,000; professional services, primarily legal, increased approximately
$80,000; and travel expenses decreased approximately $160,000 from 1999 to 2000.
There were significant decreases in most of the other selling, general and
administrative expenses from 1999 to 2000 which more than offset the net
increase in the three major expense categories.
Compensation expense from stock options decreased $233,000 to $92,000 for 2000
from $325,000 for 1999. During the fiscal year ended September 30, 1999, Covol
terminated several employees to whom compensatory stock options were granted in
prior years. These stock options were not forfeited upon termination, resulting
in the write off of the unamortized deferred compensation related to these
individuals. As a result of the write-off, amortization expense decreased.
Other Income and Expense. During 2000, Covol reported net other expenses of
$2,672,000 compared to $2,248,000 for 1999. This increase of $424,000 relates
primarily to a negative variance in interest expense of $1,353,000, offset by
positive variances between periods of $618,000 in the mark-to-market adjustment
of the carrying value of a related party note receivable collateralized by Covol
common stock and $311,000 in interest income and other income.
Interest expense increased in 2000 due primarily to the higher effective cost of
debt which existed in 2000 as compared to 1999, most notably as a result of the
convertible debt issued at a discount during March 1999. Interest expense of
$2,272,000 in 2000 resulted from the amortization of debt discount and debt
issuance costs, while only $326,000 of interest expense in 1999 consisted of
amortization of debt discount and debt issuance costs. Interest expense is
expected to decrease in the future as a result of repayment of debt related to
the sale of facilities in late 1999 and 2000 and the redemption of convertible
debt in January 2000, as well as other debt payoffs.
Income Taxes. In the quarter ended December 31, 1999, Covol recognized
$3,000,000 of its deferred tax asset. Covol believes it is more likely than not
that this portion of its total deferred tax assets will be realized as a result
of income resulting from the sale in January 2000 of a synthetic fuel facility
and an option to acquire a synthetic fuel facility. Covol did not recognize any
income tax benefit in fiscal 1999.
Extraordinary Item. In January 2000, Covol redeemed all of the convertible debt
issued from September 1999 through December 1999. The redemption consideration
given included approximately $1,000,000 in redemption premiums plus
17
<PAGE>
approximately 214,000 shares of common stock. The loss recognized as a result of
the redemption consideration paid plus the acceleration of amortization of the
unamortized debt discount and debt issuance costs totaled approximately
$1,823,000. This loss is reflected as an extraordinary item in the Consolidated
Statements of Operations.
Net Loss. For 2000, the net loss of $1,612,000 represents a change of $8,003,000
from the net loss of $9,615,000 in 1999. This is primarily due to increased
revenues, especially license fees and the gain on sale of facility, and the
reduction in cost of operations, offset by the increases in non-recurring
charges and interest expense.
Liquidity and Capital Resources
During 1998, Covol and its licensees completed the construction of and began
operations at 24 synthetic fuel facilities. Covol owned four facilities which it
held for sale and sold during 1999 and 2000. Proceeds from the sale of
facilities have been used primarily to retire debt that was incurred principally
in connection with the construction and operation of the facilities and for
working capital needs.
Net cash used in operating activities during the six months ended March 31, 2000
("2000") was $2,114,000 compared to $9,852,000 of cash used during the six
months ended March 31, 1999 ("1999"). Most of this change in cash flow from
operations is attributable to the 2000 net loss of $1,612,000 as compared to the
1999 net loss of $9,615,000. Covol has been able to fund its operating
activities, including the continued refinement and commercialization of its
patented binder technologies, through the issuance of debt and equity securities
and the sale of facilities. During 2000, proceeds from the sale of facilities
were approximately $18,089,000, net proceeds from the issuance of notes payable
and common stock warrants totaled approximately $2,980,000, and net proceeds
from the issuance of common stock totaled approximately $4,666,000.
Approximately $14,279,000 of notes payable were repaid during 2000.
With the exception of the sale of facilities in 2000, Covol's investing
activities in both 2000 and 1999 were not significant. Covol believes that funds
required for investing activities will continue to be relatively low during the
remainder of fiscal 2000. Covol has no current plans to construct additional
synthetic fuel facilities or to incur significant costs to acquire property,
plant and equipment.
Covol's working capital improved from a working capital deficit of approximately
$1,799,000 at September 30, 1999 to a positive working capital position of
approximately $15,700,000 as of March 31, 2000. Several factors caused this
change, most notably an increase in cash from the sale of facilities and
increased royalty revenues and from the sale of common stock. Accounts
receivable has increased as a result of growth in revenues during the period.
Also, the balance due under notes payable has decreased as facility-related debt
has been repaid. Covol expects its future operations to produce positive cash
flows due to the increases in synthetic fuel production by its licensees and
expects its working capital position to continue to improve during the remainder
of fiscal 2000.
In addition to expected positive cash flows from operations, Covol will receive
additional funds, totaling more than $15,000,000, when three facilities which
have been sold reach certain levels of commercial operation. For two facilities,
the requirements relate to reaching commercial operation at their new location,
and for the third facility, obtaining firm synthetic fuel "off-take" agreements
and by meeting specified operating performance criteria (see Note 5 to the
Consolidated Financial Statements). Covol expects to receive some of these
proceeds before September 30, 2000 and the balance before December 31, 2000, if
all milestones are accomplished. In addition to cash provided by operating
activities and deferred proceeds from the sale of facilities, Covol has
initiated negotiations with two financial institutions in order to secure a line
of credit. Negotiations are in the early stages and it is not possible to
project their ultimate outcome.
In April 2000, Covol sold its remaining owned synthetic fuel facility. Net cash
proceeds to Covol, after payment of related debt totaling approximately
$9,000,000 and other obligations, were approximately $300,000. Also, in April
2000, the creditor for the $3,000,000 14% note payable described in Note 3 to
the Consolidated Financial Statements converted $2,000,000 of principal into
shares of common stock and warrants for the purchase of common stock. The due
date for the remaining $1,000,000 of principal was extended to April 2001.
Following this transaction, Covol's notes payable total approximately
$16,000,000, of which approximately $2,400,000 is due within the 12 months
ending March 31, 2001. Most of the long-term notes payable balance represents
the carrying value of the $20,000,000 long-term debt issued at a discount (see
Note 3 to the Consolidated Financial Statements).
In April 2000, Covol and the holder of the $20,000,000 convertible debt amended
the terms of the convertible secured note. The revised terms call for i) a
change in the due date to September 2001, and ii) changes in the provisions for
early redemption, including a reduction in the amount of cash required to be
paid upon early redemption, and mandatory
18
<PAGE>
redemption requirements upon the receipt by Covol of certain deferred payments
from the sales of synthetic fuel facilities which occurred in August 1999 and
January 2000. In connection with this amendment, Covol redeemed $3,000,000 of
the face value of debt in April 2000 and $2,000,000 in May 2000. Covol intends
to redeem the balance of the outstanding convertible debt as soon as possible,
depending on the timing of receipt of cash from operations, deferred cash
proceeds from the sale of facilities, and cash proceeds, if any, from a line of
credit currently being negotiated.
Also in April 2000, an agreement was entered into with the holder of the series
D preferred stock, which entity also holds the $20,000,000 face value
convertible debt. The agreement provided for the redemption of 16,000 shares of
the outstanding preferred stock, which redemption occurred in April 2000. The
total redemption price paid of $2,000,000 included a $400,000 premium calculated
at 25% of the carrying amount of the preferred stock. The holder of the
preferred stock also agreed that it would not exercise its conversion rights
under the preferred stock agreement prior to May 15, 2000. In May 2000, the
remaining 19,631 shares of preferred stock were redeemed for a total redemption
price of approximately $2,454,000, including a redemption premium of
approximately $491,000.
Forward Looking Statements
Statements in this Report regarding Covol's expectations as to the financing,
development, construction, operation and sale of facilities utilizing the Covol
binder technologies, the marketing of products, the receipt of licensing fees,
the ability to extend or refinance existing obligations, and other information
about Covol 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 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) Operating issues for licensed facilities including feedstock availability,
moisture content, Btu content, correct application of binder formulation,
operability of equipment, product durability, resistance to water
absorption and overall costs of operations.
(3) Marketing issues relating to market acceptance of products manufactured
using Covol's technology, including control of moisture content, hardness,
special handling requirements and other characteristics of the synthetic
fuel product which affect its marketability and its sales price.
(4) Securing of necessary sites, including permits and raw materials, for
relocation and operation of facilities.
(5) Maintenance of placed in service requirements under Section 29 of the tax
code by synthetic fuel manufacturing facilities.
(6) Ability to obtain needed additional capital on terms acceptable to Covol.
(7) Changes in governmental regulations or failure to comply with existing
regulations which may result in operational shutdowns of licensee
facilities.
(8) The availability of tax credits under Section 29 of the tax code.
(9) The commercial feasibility of the Covol synthetic fuel technologies upon
the expiration of Section 29 tax credits.
(10) Ability to meet financial commitments under existing contractual
arrangements.
(11) Ability to meet non-financial commitments under existing contractual
arrangements.
(12) 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.
(13) Ability to commercialize the technology of others and implement
non-technology based business plans which are at an early stage of
investigation and which will require significant time and capital
investment.
(14) Dependence on licensees to successfully implement Covol binder technologies
and make license and other payments to Covol.
(15) The market acceptance of products manufactured with Covol binder
technologies in the face of competition from traditional products.
(16) Success in the face of competition by others producing synthetic fuel and
other recycled products.
(17) Sufficiency of intellectual property protections.
See "ITEM 1. BUSINESS--Forward Looking Statements" in Covol's Annual Report on
Form 10-K for the year ended September 30, 1999 for a description of additional
factors which could cause actual results to differ from expectations.
19
<PAGE>
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.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See "ITEM 3: LEGAL PROCEEDINGS" in Covol's Annual Report on Form 10-K for the
year ended September 30, 1999 for descriptions of current legal proceedings. No
material changes have occurred since that report was filed.
ITEM 2. CHANGES IN SECURITIES
Recent Sales of Unregistered Securities
The following sets forth all securities issued by Covol within the past fiscal
quarter without registering the securities under the Securities Act of 1933, as
amended. No underwriters were involved in any stock issuances.
Covol believes that the following issuances of shares of common stock, or
securities exercisable for or convertible into shares of common stock, were
exempt from the registration requirements of the Securities Act of 1933, as
amended, pursuant to the exemptions set forth in Sections 3(a)(9), 4(2) or 4(6)
thereof or Regulation D promulgated thereunder and the certificate for each
security bears a restrictive 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.
Reference is made to the redemptions of certain convertible debt; to the
conversions of series D preferred stock; to the issuance of common stock for
cash; to the issuance of warrants and common stock issued upon exercise of
warrants; and to the changes in the terms of certain notes and warrants for the
purchase of common stock, all as described in Note 2 to the consolidated
financial statements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Reference is made to Covol's Form 8-K filed on March 2, 2000 which describes
both the matters voted on by stockholders at Covol's annual meeting held on
February 29, 2000 and the results of that voting.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
10.58.1.1 Amendment No. 1 dated as of April 24, 2000 to Convertible
Secured Note executed by Covol in favor of OZ Master Fund,
Ltd.
10.59.3 Modification and Extension Agreement dated April 30, 2000
between Covol and Cherokee Associates LLC 10.67 Mountaineer
Fuels Asset Purchase Agreement dated April 17, 2000 between
DTE Kentucky, LLC and Covol
10.67.1 Mountaineer License and Binder Purchase Agreement between
DTE Kentucky, LLC and Covol *
27.1 Financial Data Schedule
20
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* This exhibit contains confidential material which has been
omitted pursuant to a Confidential Treatment Request. The
omitted information has been filed separately with the
Securities and Exchange Commission.
(b) The following reports on Form 8-K were filed during the
quarter ended March 31, 2000:
o Form 8-K filed on January 24, 2000, as amended on Form 8-K/A
filed on March 16, 2000, for events dated December 31, 1999
and January 18, 2000 (Sales of two synthetic fuel facilities),
o Form 8-K filed on February 22, 2000, for event dated February
16, 2000 (Letter sent to stockholders),
o Form 8-K filed on March 2, 2000, for event dated February 29,
2000 (Results of annual meeting of stockholders),
o Form 8-K filed on March 22, 2000, for event dated March 15,
2000 (Sale of common stock),
o Form 8-K filed on March 30, 2000, for event dated March 15,
2000 (Response to Nasdaq requirement, including pro forma
condensed consolidated statement of operations for the two
months ended February 29, 2000 and pro forma condensed
consolidated balance sheet as of February 29, 2000).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COVOL TECHNOLOGIES, INC.
Date: May 8, 2000 By: /s/ Kirk A. Benson
------------------
Kirk A. Benson, Chief Executive
Officer and Principal Executive
Officer
Date: May 8, 2000 By: /s/ Steven G. Stewart
-------------------------------
Steven G. Stewart, Chief Financial
Officer and Principal Financial
Officer
21
AMENDMENT NO. 1 TO CONVERTIBLE SECURED NOTE
AMENDMENT NO. 1, dated as of April 24, 2000, to the CONVERTIBLE SECURED
NOTE (the "Note") dated March 17, 1999, issued by Covol Technologies, Inc. (the
"Company") in favor of OZ Master Fund, Ltd. (the "Purchaser").
The parties agree as follows:
Section 1. Definitions in Amendment. Any capitalized term used herein
and not defined shall have the meaning assigned to it in the Note or the
Purchase Agreement (as defined in the Note).
Section 2. Modifications to the Note.
(a) Mandatory and Optional Redemptions. Section 3(a) of the
Note is hereby amended to read in its entirety as follows:
"(a) Mandatory and Optional Redemptions. (i) Upon the
occurrence of each and any Redemption Event, the Company shall redeem the
outstanding principal amount of this Note in an amount equal to the Mandatory
Redemption Amount (plus accrued and unpaid interest thereon through and
including the date of payment). Any redemption pursuant to this Section 3(a)(i)
shall be made within five (5) Business Days of the occurrence of the Redemption
Event and shall reduce the outstanding principal amount of this Note by an
amount equal to the Deemed Reduction Amount.
(ii) At any time after the occurrence of the Effective Date
(as defined in the First Amendment), the Company may redeem all or any part of
the aggregate principal amount of this Note, provided that the amount of such
redemption (the "Optional Redemption Amount") must be at least $1,000,000, and
must include any accrued and unpaid interest through and including the date of
payment on the Optional Redemption Amount. Any redemption pursuant to this
Section 3(a)(ii) shall reduce the outstanding principal amount of this Note by
an amount equal to the Deemed Reduction Amount.
(iii) If at any time the Company fails to perform or observe
Section 8.2(j) of the Purchase Agreement, at the option of the holder of this
Note, the Company shall redeem the aggregate principal amount of this Note at a
price equal to the Optional Redemption Price (plus accrued and unpaid interest
thereon through and including the date of payment)."
(b) Event of Default. Section 4(a) is hereby amended by (i)
deleting the word "or" at the end of clause (xvii) thereof, (ii) replacing the
period at the
<PAGE>
end of clause (xviii) thereof with "; or" and (iii) adding a new clause (xix) at
the end thereof as follows:
"(xix) the Company shall amend any of the Algoma Contract, the
Mohave Contract or the River Hill Contract without the consent of the holders of
at least two-thirds (2/3) in outstanding principal amount of this Note."
(c) Maturity Date. The definition of the term "Maturity Date"
in Section 8 of the Note is hereby amended to read in its entirety as follows:
""Maturity Date" means September 17, 2001."
(d) Optional Redemption Price. The definition of the term
"Optional Redemption Price" in Section 8 of the Note is hereby amended to read
in its entirety as follows:
""Optional Redemption Price" means (i) in the case of a
redemption of this Note pursuant to Section 3(a)(i) of this Note, the Mandatory
Redemption Amount, (ii) in the case of a redemption of this Note pursuant to
Section 3(a)(ii) of this Note, the Optional Redemption Amount and (iii) in the
case of a redemption of this Note pursuant to Section 3(a)(iii) of this Note,
the then-outstanding principal amount of this Note."
(e) Additional Definitions. Section 8 of the Note is hereby
amended by having the following definitions added thereto in the appropriate
alphabetic order:
"Deemed Reduction Amount", with respect to any redemption of
this Note pursuant to Section 3(a)(i) or (ii) of this Note, sum of (i) the
Mandatory Redemption Amount or Optional Redemption Amount, as the case may be,
paid in connection with such redemption, plus (ii) interest on such Mandatory
Redemption Amount or Optional Redemption Amount, as the case may be, at an
interest rate of twelve percent (12%) per annum calculated from and excluding
the date on which such Mandatory Redemption Amount or Optional Redemption
Amount, as the case may be, is actually paid to the holder of this Note through
and including the Maturity Date, based upon a 360 day year.
"Algoma Contract" means the Asset Purchase Agreement dated
January 13, 2000 among Premier Elkhorn Coal Company, TECO Coal Corporation,
Pocahontas Synfuel, L.L.C., Covol Technologies, Inc., and Synfuel Investments,
Inc.
"Algoma Event" means payment of the Subsequent Consideration
under, and as defined in, section 2.2(b) of the Algoma Contract.
"First Amendment" means Amendment No. 1 to this Note, dated as
of April 24, 2000, between the Company and the Purchaser.
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<PAGE>
"First River Hill Event" means any payment of any Lump-Sum
Royalty Payment under, and as defined in, section 3.2 of the River Hill License
Contract.
"Mandatory Redemption Amount" means (i) in the case of the
First River Hill Event or the Second River Hill Event, eighty percent (80%) of
the difference of (A) the amount of any and all proceeds paid to the Company
under the River Hill License Contract or River Hill Purchase Contract,
respectively, less (B) the sum of (1) the amount, if any, and in no event exceed
ten percent (10%) of the amount referred to in clause (i)(A) of this definition,
of payments to third parties due as a result of the First River Hill Event or
Second River Hill Event, as the case may be, under that Settlement and Release
Agreement dated October 15, 1999 among Covol Technologies, Inc., Interlink
Management Corporation, and Campbell, George & Strong, L.L.P.; (2) the amount,
if any, and in no event exceed $350,000, of payments to third parties due as a
result of the First River Hill Event or Second River Hill Event, as the case may
be, under that Letter Agreement dated March 10, 1999 between Covol Technologies,
Inc. and Meridian Energy Corporation; and (3) subject to the proviso at the end
of this definition, the amount, if any, of payments to third parties due as a
result of the First River Hill Event or Second River Hill Event, as the case may
be, under that Settlement Agreement and Mutual General Release dated November 9,
1999 between Covol Technologies, Inc. and Coalco Corporation, as amended (the
"Coalco Settlement Agreement"); (ii) in the case of the Algoma Event,
$1,600,000, less eighty percent (80%) of the amount (subject to the proviso at
the end of this definition) of any payment due as a result of the Algoma Event
under the Coalco Settlement Agreement; and (iii) in the case of the Mohave
Event, $3,200,000; provided, however, that for the purposes of this definition
the there shall be no reduction of the Mandatory Redemption Amounts for amounts
payable under the Coalco Contract as a result of any Redemption Event in excess
of $125,000 in the aggregate for all Redemption Events.
"Mohave Contract" means the Option and Purchase Agreement
dated January 21, 2000 among Premier Elkhorn Coal Company, TECO Coal
Corporation, and Covol Technologies, Inc.
"Mohave Event" means payment of the Subsequent Consideration
under, and as defined in, section 2.2(b) of the Mohave Contract.
"Optional Redemption Amount" has the meaning set forth in
Section 3(a)(ii) hereof.
"Redemption Event" means each of the following: (i) the First
River Hill Event, (ii) the Second River Hill Event, (iii) the Algoma Event and
(iv) the Mohave Event.
"River Hill License Contract" means the License and Binder
Purchase Agreement dated August 27, 1999 between DTE River Hill, L.L.C. and
Covol Technologies, Inc.
"River Hill Purchase Contract" means the River Hill Project
Purchase Agreement dated August 27, 1999 between DTE River Hill, L.L.C. and
Covol Technologies, Inc.
-3-
<PAGE>
"Second River Hill Event" means payment of the Performance
Payment under, and as defined in, section 2.7 of the River Hill Purchase
Contract.
Section 3. Consent. Upon the Effective Date (as defined below), and
subject to the Purchaser receiving the payment of the amount set forth in
Section 5(b) of this Amendment No. 1, the Purchaser hereby consents, pursuant to
Section 4 of the Note, Section 5(B) of the Certificate of Designations and
Section 8.1 of the Securities Purchase Agreement, to (a) the redemption by the
Company, at any time on or prior to May 15, 2000, of all outstanding shares of
Preferred Stock held by the Purchaser for an aggregate Redemption Price (as
defined in the Certificate of Designations) of $125 per share and (b) the
optional redemption of the Note from time to time by the Company in accordance
with the terms of the Note as amended hereby. This consent does not and shall
not constitute a consent to any other or further departure from, or the waiver
of any Default or Event of Default under, the terms of the Purchase Agreement or
the Related Documents, which terms shall continue in full force and effect;
provided, that nothing herein shall be construed as a limitation upon the
consent to the Partial Note Redemption and the Partial Preferred Stock
Redemption under, and as defined in, that letter agreement dated April 24, 2000
between the parties hereto.
Section 4. Covenants. Subject to the occurrence of the Effective Date,
the Purchaser hereby agrees that if the outstanding principal amount of the Note
is at any time reduced to $7,500,000 or less, the Purchaser shall negotiate with
the Company in good faith to amend the covenants contained in Sections 8.1 and
8.2 of the Purchase Agreement and Section 4 of the Note to reduce or eliminate
the requirements of the Company thereunder.
Section 5. Conditions to Effectiveness. This Amendment No. 1 shall
become effective only upon satisfaction in full of the following conditions
precedent (the first date upon which all such conditions have been satisfied
being herein called the "Effective Date"):
(a) The Purchaser shall have received a counterpart of this
Amendment No. 1 signed by the Company.
(b) The Company shall have redeemed the Note in part by paying
to the Purchaser an aggregate amount of $5,000,000 (together with accrued and
unpaid interest thereon), such that the outstanding principal amount of the Note
shall be reduced to $15,000,000.
(c) All legal matters incident to this Amendment No. 1 shall
be satisfactory to the Purchaser and its counsel.
-4-
<PAGE>
Section 6. Representations and Warranties. The Company represents and
warrants to the Purchaser as follows:
(a) the Company (i) is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and (ii)
has all requisite corporate power, authority and legal right to execute, deliver
and perform this Amendment No. 1, and to perform the Note, as amended hereby.
(b) The execution, delivery and performance of this Amendment
No. 1 by the Company, and the performance by the Company of the Note, as amended
hereby (i) have been duly authorized by all necessary corporate action, (ii) do
not and will not contravene its charter or by-laws or any applicable law, and
(iii) except as provided in the Related Agreements, do not and will not result
in the creation of any lien upon or with respect to any of its respective
properties.
(c) This Amendment No. 1 and the Note, as amended hereby,
constitute the legal, valid and binding obligations of the Company, enforceable
against the Company in accordance with its terms.
(d) No authorization or approval or other action by, and no
notice to or filing with, any governmental authority is required in connection
with the due execution, delivery and performance by the Company of this
Amendment No. 1 and the performance by the Company of the Note as amended
hereby.
(e) The representations and warranties contained in Section 4
of the Purchase Agreement and in each other Related Agreement are correct on and
as of the date made, and no Event of Default or Default will result from this
Amendment No. 1 becoming effective in accordance with its terms.
Section 7. Continued Effectiveness of the Note and Related Agreements.
The Company hereby (i) confirms and agrees that each Related Agreement to which
it is a party is, and shall continue to be, in full force and effect and is
hereby ratified and confirmed in all respects except that on and after the date
hereof all references in any such Related Agreement to "the Note", "thereto",
"thereof", "thereunder" or words of like import referring to the Note shall mean
the Note as amended by this Amendment No. 1; and (ii) confirms and agrees that
to the extent that any such Related Agreement purports to assign or pledge to
the Purchaser, or to grant a security interest in or lien on, any collateral as
security for the obligations of the Company from time to time existing in
respect of the Note and the Related Agreements, such pledge, assignment and/or
grant of the security interest or lien is hereby ratified and confirmed in all
respects.
-5-
<PAGE>
Section 8. Miscellaneous.
(a) Continued Effectiveness of the Note. Except as otherwise
expressly provided herein, the Note and the other Related Agreements are, and
shall continue to be, in full force and effect and are hereby ratified and
confirmed in all respects. Except as expressly provided herein, the execution,
delivery and effectiveness of this Amendment No. 1 shall not operate as an
amendment of any right, power or remedy of the Purchaser under the Note or any
other Related Agreement, nor constitute an amendment of any provision of the
Note or any other Related Agreement.
(b) Counterparts. This Amendment No. 1 may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which shall be deemed to be an original, but all of which taken together
shall constitute one and the same agreement.
(c) Headings. Section headings herein are included for
convenience of reference only and shall not constitute a part of this Amendment
No. 1 for any other purpose.
(d) Governing Law. This Amendment No. 1 shall be governed by,
and construed in accordance with, the law of the State of New York.
(e) Amendment as Related Agreement. The Company hereby
acknowledges and agrees that this Amendment No. 1 constitutes a "Related
Agreement". Accordingly, it shall be an Event of Default under the Note if the
Company shall fail to perform or observe any term, covenant or agreement
contained in this Amendment No. 1.
(f) Waiver of Jury Trial. THE COMPANY AND THE PURCHASER EACH
HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AMENDMENT NO. 1 OR THE ACTIONS OF THE COMPANY OR THE PURCHASER
IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1
to be executed by authorized persons thereof.
COVOL TECHNOLOGIES, INC.
By: /s/ Steven G. Stewart
----------------------
Name: Steven G. Stewart
Title: CFO
OZ MASTER FUND, LTD.
By: /s/ Daniel S. Och
----------------------
Name: Daniel S. Och
Title: Managing Member
-7-
MODIFICATION AND EXTENSION AGREEMENT
THIS MODIFICATION AND EXTENSION AGREEMENT is made and entered into as
of April 30, 2000 between COVOL TECHNOLOGIES, INC., a Delaware corporation
("Covol") and CHEROKEE ASSOCIATES LLC, a Colorado limited liability company
("Cherokee").
RECITALS
A. Covol is a party to a Loan and Security Agreement dated as of June
12, 1998 (the "Security Agreement") in which Trans Pacific Stores, Ltd. ("TPS")
appears as the "Lender", together with the related Secured Draw Down Promissory
Note in the original principal amount of $4 Million (the "Note"). The Security
Agreement, the Note and the related Common Stock Purchase Warrants dated as of
October 12, 1998 to purchase 100,000 shares of Covol common stock are sometimes
referred to herein as the "Loan Documents". The Loan Documents have previously
been modified by a Letter Amendment dated May 6, 1999.
B. TPS has assigned all of its right, title and interest in the Loan
Documents to Cherokee.
C. As currently written, the principal balance of the Note is due and
payable on April 30, 2000. Covol and Cherokee desire to modify the Loan
Documents to provide for (i) the repayment of $2.0 Million of the principal
balance of the Note through the issuance of Covol common stock, (ii) the
extension of the maturity date of the remaining $1.0 Million principal balance
of the Note, and (iii) certain other changes as set forth herein.
NOW THEREFORE, in consideration of the premises, the covenants and
condition contained herein and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties agree to be
legally bound as follows:
1. Acknowledgment of Amounts Owed. Covol and Cherokee acknowledge and
agree that as of April 30, 2000 the total amount owed by Covol pursuant to the
Note and other Loan Documents is (i) the principal balance of $3.0 Million, plus
(ii) accrued interest for the month of April, 2000 in the amount of $34,520.55.
2. Modification of Note. Section 2 of the Note is hereby modified to
provide that (i) $2.0 Million of the principal balance shall be paid on the
effective date of this Agreement through the issuance of Covol common stock as
set forth in paragraph 4 below, (ii) the remaining $1.0 Million principal
balance shall be due and payable, together with any accrued but unpaid interest,
on April 30, 2001. Interest on the principal balance shall continue to bear
interest at 14% per annum, payable monthly in arrears. This Agreement, together
with the May 6, 1999 Letter Amendment referred to in the Recitals above, shall
be affixed to the original Note.
3. Payment of Accrued Interest. Cherokee agrees that, in full
satisfaction of accrued
1
<PAGE>
interest due under the Note through April 30, 2000, Covol shall pay (i)
$19,561.64 to TPS, representing interest accrued through April 17, 2000 and (ii)
$14,958.91 to Cherokee. Such payments shall be by Covol check.
4. Payment of Principal in Stock. Covol shall deliver to Cherokee, and
Cherokee shall accept from Covol, 1,185,818 shares of Covol's restricted common
stock, $.001 par value (the "Shares") in full payment and satisfaction of the
$2.0 Million of principal due on April 30, 2000.
5. Partial Release of Collateral. Cherokee hereby releases any and all
interest it may have pursuant to the Security Agreement or the other Loan
documents in and to the Promissory Note between Covol and Gerald M. Larson dated
August, 1996 and referred to in paragraph 3.2 of the Security Agreement in the
original principal amount of $5,000,000.00. Cherokee shall deliver, or cause to
be delivered, to Covol the original of such Promissory Note, including the
related Guaranty of Gerald M. Larson dated April 29, 1998, as soon as
practicable after the effective date of this Agreement, but in any event no
later than May 19, 2000.
6. Consideration for Modification. As additional consideration for
Cherokee's agreement to accept the Shares in payment of principal and modify the
Note as set forth herein, Covol shall issue to Cherokee Common Stock Purchase
Warrants (the "Warrants") entitling Cherokee to purchase up to 296,454 shares of
Covol restricted common stock (the "Warrant Shares") at an exercise price of
$2.10 per share. The Warrants will expire April 30, 2005. The Warrants will be
in substantially the form attached hereto as Exhibit "A".
7. Cherokee Representations and Warranties. Cherokee represents and
warrants to Covol as follows:
a. Cherokee acknowledges receipt of the summary of risk
factors (the "Risk Factors") attached as Exhibit "B" to this Agreement
and has access to and has reviewed the publicly filed reports (the
"Public Filings") of Covol listed on Exhibit "C" to this Agreement.
Cherokee further acknowledges that it has read carefully and
understands the Risk Factors and the Public Filings, and has had the
opportunity to meet with officers of Covol to ask questions and, prior
to its execution of this Agreement, was given full access to all
information which Covol possesses or can acquire without unreasonable
effort or expense that is necessary to verify the accuracy of
information furnished to Cherokee, and all such questions, if asked,
have been answered satisfactorily and such documents, if examined, have
been found to be fully satisfactory. Cherokee further acknowledges
that, in making its investment decision, it is relying upon its own
investment judgment and the Risk Factors and Public Filings. No other
representations have been made to, or authorized to be made to,
Cherokee. Cherokee agrees to keep confidential and not to disclose to
third parties any non-public information concerning Covol that it
receives in connection with the purchase of the Shares and Warrants.
2
<PAGE>
b. The Shares and Warrants are being acquired by Cherokee for
its own account, for investment only and not presently with a view
toward resale or distribution in a manner which would require
registration of such securities under the Securities Act of 1933 (the
"Securities Act").
c. Cherokee is authorized and otherwise duly qualified to
purchase and hold the Shares and Warrants. Cherokee certifies that all
of its equity owners are "accredited investors" as defined in Rule 501
promulgated under the Securities Act. Upon request of Covol. Cherokee
will provide a list of its equity owners and questionnaires or other
proof of the accredited investor status of each. Cherokee was not
formed for the specific purpose of acquiring the Note, Shares or
Warrants.
d. Cherokee understands that the Shares, the Warrants and the
Warrant Shares have not been registered under the Securities Act.
Cherokee is fully aware of the restrictions on sale, transferability
and assignment of the Shares, Warrants and Warrant Shares as set forth
in this Agreement and the certificates of such securities, and that
Cherokee must bear the economic risk of Cherokee's investment in Covol
for an indefinite period of time because the offering has not been
registered under the Securities Act, and, therefore, the securities
cannot be offered or sold unless they are subsequently registered under
the Securities Act or an exemption from such registration is available.
Cherokee further understands that the Shares, Warrants and Warrant
Shares will bear an appropriate legend to this effect.
e. Cherokee is aware of the following:
i. The Shares, Warrants and Warrant Shares are
speculative investments which involve a high degree of risk, including
those risks outlined in Exhibit "B" and Exhibit "C"; and
ii. There are substantial restrictions on the
transferability of the securities. The Shares, Warrants and Warrant
Shares have not been, and except as set forth in this Agreement
shareholders have no rights to require that such securities be,
registered under the Securities Act and it may not be possible for
Cherokee to liquidate Cherokee's investment in Covol. Cherokee further
agrees to be responsible for compliance with all conditions on transfer
imposed by any state blue sky or securities law.
f. Cherokee warrants and represents that it has such knowledge
and experience in financial and business matters that it is capable of
evaluating the merits and risks of an investment in Covol and the
Shares, Warrants and Warrant Shares, and that Cherokee is able to bear
the economic risks of the investment for an indefinite period of time
and at the present time could afford a complete loss of such
investment.
3
<PAGE>
g. Cherokee originally acquired the Note from TPS in a private
transaction between related entities which did not involve any public
offering, general advertising or general solicitation.
8. Covol Representations and Warranties. Covol represents and warrants
to Cherokee as follows:
a. Covol is a corporation duly incorporated and in good
standing under the laws of the State of Delaware.
b. Covol's execution of this Agreement and the issuance of the
Shares and Warrants have been duly authorized. The Shares will be, when
issued as set forth herein, duly issued, fully paid and non-assessable.
When the Warrants are exercised and the full exercise price paid as
provided therein, the Warrant Shares issued on exercise of the Warrants
will be duly issued, fully paid and non-assessable.
c. Covol has completed the sale of its Mountaineer synfuel
facility. Except as set forth herein, there has not been a material
adverse change to the business or financial condition of Covol since
the date of the most recent Public Filing described on Exhibit "C".
9. Registration Rights Under Securities Act.
a. Covol agrees to use its best reasonable efforts to file at
its expense, no later than 15 days following the date hereof, a
registration statement on Form S-3 including the Shares and Warrant
Shares for resale. Covol will use its best reasonable efforts to cause
such registration statement to become effective as soon as practicable,
and will take all other reasonable action necessary under any Federal
or state law or regulation of any governmental authority to permit all
such Shares and Warrant Shares which it has included in such
registration statement to be sold or otherwise disposed of, and will
use its best reasonable efforts to maintain such compliance with each
such Federal and state law and regulation of any governmental authority
for the earlier of (A) twelve months from the date of effectiveness of
such registration statement under the Securities Act and (B) the date
upon which Cherokee has completed the sale or other disposition of all
of the Shares. Covol may include securities being sold by other
stockholders in such registration statement. Cherokee shall be
responsible for the costs of any separate counsel retained by it and
for any underwriting discounts or commissions incurred by it.
b. Cherokee shall promptly provide Covol with such information
regarding Cherokee and Cherokee's plan of distribution as Covol may
reasonably request in order to prepare the registration statement.
Covol's obligation to obtain and maintain the effectiveness of any
registration statement is conditioned on Covol's continued ability to
4
<PAGE>
utilize Form S-3 (or any successor short form registration statement)
for secondary offerings. If Covol determines in good faith that it is
necessary or in Covol's best interest to amend any effective
registration statement, it shall so notify Cherokee and Cherokee shall
suspend all sales under the registration statement until Covol has
either amended the registration statement or notified Cherokee that
sales can resume. The twelve month period referred to in paragraph 9.a
shall be extended by any period for which sales were so suspended.
c. If Covol fails or is unable to file and obtain
effectiveness of the Form S-3 registration statement as provided in
paragraph described 9.a, Covol shall grant Cherokee, as Cherokee's sole
and exclusive remedy, the piggy-back registration rights as provided in
Exhibit "D" attached hereto, subject to the existing registration
rights previously granted by Covol to other persons.
d. In connection with any registration statement including the
Shares or Warrant Shares, Covol shall (i) furnish to Cherokee and any
underwriter designated by Cherokee, such copies of the prospectus,
including the preliminary prospectus, conforming to the Securities Act
(and such other documents as Cherokee or each such underwriter may
reasonably request) in order to facilitate the sale or distribution of
the Shares or Warrant Shares, (ii) use its best reasonable efforts to
register or qualify the Shares and Warrant Shares under the blue sky
laws (to the extent applicable) of such jurisdiction or jurisdictions
as Cherokee and any appointed underwriter shall reasonably request and
(iii) take such other actions as may be reasonably necessary or
advisable to enable Cherokee and such underwriters to consummate the
sale or distribution in such jurisdiction or jurisdictions in which
Cherokee shall have reasonably requested.
10. Notice Addresses. For purposes of this Agreement and the Loan
Documents, the notice address of Cherokee is 555 Zang St., Suite 300, Lakewood,
Colorado 80228. Covol's notice address remains 3280 N. Frontage Road, Lehi, Utah
84043.
11. Continued Validity. Except as modified herein and as necessary to
reflect the assignment by TPS to Cherokee, the Loan Documents shall remain in
full force and effect.
12. Further Assurances. Covol and Cherokee hereby covenant and agree to
execute and deliver, or cause to be executed and delivered, and to do or make,
or cause to be done or made, upon the reasonable request of the other, any and
all instruments, papers, deeds, acts or things, supplemental, confirmatory or
otherwise, as may be reasonably required by such party for the purpose of
effecting the modification described herein.
13. Merger. This Agreement and the Loan Documents constitute the entire
agreement between the parties hereto as to the transactions contemplated hereby
and supersedes all prior discussions, understandings or agreements between the
parties hereto.
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14. Successors and Assigns. This Agreement shall bind and inure to the
benefit of the parties hereto and their respective successors and assigns.
15. Governing Law. This Agreement and all other instruments referred to
herein shall be governed by, and shall be construed according to, the laws of
the State of Utah.
16. Counterparts. To facilitate execution, this Agreement may be
executed in as many counterparts as may be required. It shall not be necessary
that the signature on behalf of the parties hereto appear on each counterpart
hereof, and it shall be sufficient that the signature on behalf of each party
hereto appear on one or more such counterparts. All counterparts shall
collectively constitute a single agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date and year first above written.
Cherokee: CHEROKEE ASSOCIATES LLC
By /s/ John P. Hill, Jr.
-----------------------------
John P. Hill, Jr.
Its Manager
Covol: COVOL TECHNOLOGIES, INC.
By /s/ Steven G. Stewart
-----------------------------
Steven G. Stewart
Its: Chief Financial Officer
6
MOUNTAINEER FUELS
ASSET PURCHASE AGREEMENT
by and between
DTE KENTUCKY, LLC
and
COVOL TECHNOLOGIES, INC.
MOUNTAINEER FUELS, LLC
SYNFUEL INVESTMENTS, INC.
April 17, 2000
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS.......................................................1
1.1. Acknowledgment and Release....................................1
1.2. Affiliate.....................................................1
1.3. Agreement.....................................................1
1.4. As-Built Drawings.............................................1
1.5. Assets........................................................2
1.6. Assignment Agreement..........................................2
1.7. Bill of Sale..................................................2
1.8. Books and Records.............................................2
1.9. Buyer's Closing Certificate...................................2
1.10. Closing......................................................2
1.11. Closing Date.................................................2
1.12. Code.........................................................2
1.13. Confidentiality Agreement....................................2
1.14. Contracts....................................................2
1.15. Covol........................................................2
1.16. Covol Process................................................2
1.17. Effective Time...............................................3
1.18. Excluded Assets..............................................3
1.19. Facility.....................................................3
1.20. Facility Site................................................3
1.21. Fixed Assets.................................................3
1.22. GAAP.........................................................3
1.23. Holdback Amount..............................................3
1.24. HSR Act......................................................3
1.25. Improvements.................................................3
1.26. Initial Purchase Consideration...............................3
1.27. IRS..........................................................3
1.28. Knowledge of Buyer...........................................3
1.29. Knowledge of Sellers.........................................3
1.30. Law..........................................................3
1.31. License and Binder Purchase Agreement........................4
1.32. Lien.........................................................4
1.33. Loss.........................................................4
1.34. Material Adverse Effect......................................4
1.35. Opinion of Sellers' Counsel..................................4
1.36. Permitted Liens..............................................4
1.37. Plans and Specifications.....................................4
1.38. Product......................................................4
1.39. Purchase Consideration.......................................4
1.40. Required Consents............................................4
1.41. Section 29 Product...........................................5
i
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1.42. Sellers' Closing Certificate.................................5
1.43. Site.........................................................5
1.44. Transaction Documents........................................5
ARTICLE II PURCHASE AND SALE................................................5
2.1. Purchase and Sale.............................................5
2.2. Payment of the Initial Purchase Consideration; Holdback
Amount......................................................5
2.3. Deliveries at Closing.........................................6
2.4. Allocation of Purchase Price..................................7
2.5. No Assumption of Liabilities..................................7
2.6. Sales Tax Exemption...........................................7
ARTICLE III REPRESENTATION AND WARRANTIES OF SELLERS........................7
3.1. Corporate Standing............................................7
3.2. Authorizations; Binding Agreements............................8
3.3. No Actions Affecting Enforcement of the Agreement and
the other Transaction Documents.............................8
3.4. Taxes.........................................................9
3.5. Brokers or Finders Fees.......................................9
3.6. No Imposition of Liens........................................9
3.7. Title to Assets...............................................9
3.8. Condition of Assets...........................................9
3.9. Pending Litigation...........................................10
3.10. Compliance With Laws........................................10
3.11. Status of Contracts.........................................10
3.12. Consents....................................................11
3.13. Books and Records...........................................11
3.14. Environmental Conditions....................................11
3.15. Liabilities.................................................12
3.16. Agreements with Related Persons.............................12
3.17. Adequacy of the Purchased Assets............................12
3.18. No Default..................................................12
3.19. Production Capacity.........................................12
3.20. Section 29 Issues...........................................12
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER.........................13
4.1. Organization and Standing....................................13
4.2. Authorizations; Binding Agreements...........................13
4.3. Brokers or Finders Fees......................................13
4.4. No Action Affecting Enforcement of the Agreement and
the other Transaction Documents............................13
ARTICLE V CERTAIN UNDERSTANDINGS AND AGREEMENTS............................14
5.1. Best Efforts.................................................14
5.2. Public Announcements.........................................14
5.3. Confidentiality..............................................14
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<PAGE>
5.4. Taxes........................................................14
5.5. Private Letter Ruling Repurchase Option......................14
5.6. Solvency Representations and Covenants.......................15
5.7. Removal and Delivery of Facility.............................15
5.8. Software Reinstallation......................................16
ARTICLE VI CONDITIONS PRECEDENT TO THE PAYMENT OBLIGATIONS OF BUYER........16
6.1. Compliance with Agreement....................................16
6.2. Proceedings and Instruments Satisfactory.....................16
6.3. No Litigation................................................16
6.4. Representations and Warranties...............................16
6.5. Consents.....................................................16
6.6. Tax Opinion..................................................17
6.7. Antitrust Filings............................................17
ARTICLE VII CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLERS.............17
7.1. Compliance with Agreement....................................17
7.2. Proceedings and Instruments Satisfactory.....................17
7.3. No Litigation................................................17
7.4. Representations and Warranties...............................17
7.5. Required Consents............................................17
7.6. Antitrust Filings............................................18
ARTICLE VIII INDEMNITIES AND ADDITIONAL COVENANTS..........................18
8.1. Sellers' Indemnity...........................................18
8.2. Buyer's Indemnity............................................19
8.3. Bulk Sales Compliance........................................20
8.4. Additional Instruments.......................................20
8.5. Access to Books, Records and Employees.......................21
ARTICLE IX TERMINATION.....................................................21
9.1. Termination..................................................21
9.2. Rights on Termination; Waiver................................21
ARTICLE X MISCELLANEOUS....................................................22
10.1. Entire Agreement; Amendment.................................22
10.2. Expenses....................................................22
10.3. Governing Law; Consent to Jurisdiction......................22
10.4. Assignment..................................................23
10.5. Notices.....................................................23
10.6. Counterparts; Headings......................................24
10.7. Interpretation..............................................24
10.8. Severability................................................24
10.9. No Reliance.................................................24
10.10. Parties in Interest........................................24
10.11. Specific Performance.......................................25
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<PAGE>
EXHIBITS AND SCHEDULES
SCHEDULE 1.14 Contracts
SCHEDULE 1.18 Excluded Assets
SCHEDULE 1.21 Fixed Assets
SCHEDULE 1.28 Knowledge of Buyer
SCHEDULE 1.29 Knowledge of Sellers
SCHEDULE 1.35 Opinion of Sellers' Counsel
SCHEDULE 1.36 Permitted Liens
SCHEDULE 1.40 Required Consents
SCHEDULE 2.2 Third Party Engineers
SCHEDULE 3.3 Pending Actions
SCHEDULE 3.5 Brokers or Finders Fees of Sellers
SCHEDULE 3.7 Exceptions to Title
SCHEDULE 3.8 Condition of Assets
SCHEDULE 3.9 Pending Litigation
SCHEDULE 3.11 Status of Contracts
SCHEDULE 3.14 Environmental Conditions
SCHEDULE 3.16 Agreements with Related Persons
EXHIBIT A Assignment Agreement
EXHIBIT B Bill of Sale
EXHIBIT C Buyer's Closing Certificate
EXHIBIT D Sellers' Closing Certificate
EXHIBIT E License and Binder Purchase Agreement
EXHIBIT F Allocation of Purchase Price
iv
<PAGE>
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT, made as of April 17, 2000, by and between DTE
KENTUCKY, LLC, a Delaware limited liability company ("Buyer"), and COVOL
TECHNOLOGIES, INC., a Delaware corporation, MOUNTAINEER FUELS, LLC, a Utah
limited liability company, and SYNFUEL INVESTMENTS, INC., a Utah corporation
("Sellers").
RECITALS
WHEREAS, Mountaineer Fuels, LLC owns the Assets comprised of a
processing Facility to produce solid synthetic fuel pellets from coal fines
located near Tallmansville, West Virginia and Mountaineer Fuels, LLC is
controlled by the other Sellers; and
WHEREAS, Sellers desire to sell the Assets and assign the Contracts (as
defined herein) to Buyer and Buyer desires to purchase the Assets from Sellers,
all on the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the Recitals and of the mutual
covenants, conditions and agreements set forth herein and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, it is hereby agreed that:
ARTICLE I
DEFINITIONS
When used in this Agreement, the following terms shall have the
meanings specified:
1.1. Acknowledgment and Release shall mean that certain Acknowledgment
and Release, made as of April 17, 2000, by and between Covol and Mountaineer
Synfuel, L.L.C.
1.2. Affiliate shall mean, as to any person, any other person or entity
that, directly or indirectly through one or more intermediaries, controls, is
controlled by or is under common control with such person. For purposes of this
definition, "control" (including, with correlative meanings, the terms "under
common control with" and "controlled by"), as used with respect to any Person,
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management or policies of such Person, whether through the
ownership of voting stock or other equity interests, by contract or otherwise.
1.3. Agreement shall mean this Purchase Agreement, together with the
Exhibits and Schedules attached hereto, as the same may be amended from time to
time in accordance with the terms hereof.
1.4. As-Built Drawings shall mean as-built drawings reflecting
necessary revisions on the original tracings of the Plans and Specifications and
related drawings relating to the Facility
<PAGE>
necessary to indicate such field changes as may have been found necessary to
suit conditions at the Facility Site and any other revisions made in the course
of construction of the Facility.
1.5. Assets shall mean, collectively, the Improvements, the Books and
Records, and the Fixed Assets, together with all goodwill associated with the
Facility.
1.6. Assignment Agreement shall mean the Assignment Agreement between
Sellers and Buyer relating to the Contracts in the form of Exhibit A attached
hereto.
1.7. Bill of Sale shall mean the Bill of Sale from Sellers to Buyer
relating to the Assets, in the form of Exhibit B attached hereto.
1.8. Books and Records shall mean original or true and complete copies
of all of the books, records, files, data and information of Sellers relating to
the design, construction and operation of the Facility and operation of the
business prior to the Effective Time, which are relevant to Buyer's use of the
Assets, performance under the Contracts and operation of the Facility and the
Business after the Effective Time, including without limitation Plans and
Specifications, all original tracings of the related drawings and designs and
the As-Built Drawings.
1.9. Buyer's Closing Certificate shall mean the certificate of Buyer
substantially in the form of Exhibit C attached hereto.
1.10. Closing shall mean the meeting of the parties to be held at 9:00
a.m., local time, on the Closing Date, at the offices of Hunton & Williams,
Riverfront Plaza, East Tower, 951 East Byrd Street, Richmond, Virginia, or such
other time and place as the parties may mutually agree in writing.
1.11. Closing Date shall mean April 17, 2000, or such other date as the
parties may mutually agree in writing.
1.12. Code shall mean the Internal Revenue Code of 1986, as amended,
and the regulations thereunder.
1.13. Confidentiality Agreement shall mean the Letter Agreement, dated
April 27, 1999, between Sellers and DTE Energy Services Company.
1.14. Contracts shall mean all construction agreements relating to the
Facility and the Improvements, or components thereof, all as listed on Schedule
1.14 attached hereto or as otherwise agreed upon by Buyer prior to the Closing
Date.
1.15. Covol shall mean Covol Technologies, Inc.
1.16. Covol Process shall mean Covol's proprietary synthetic coal fuel
production process for manufacturing solid synthetic fuel from coal fines which
is defined in and is the subject of the License and Binder Purchase Agreement.
2
<PAGE>
1.17. Effective Time shall mean 12:01 a.m., Eastern Time, on the
Closing Date.
1.18. Excluded Assets shall mean the items listed on Schedule 1.18
attached hereto.
1.19. Facility shall mean the solid synthetic fuel pellet manufacturing
Facility and related support facilities owned by Sellers and currently
dismantled and stored at the Buccaneer Storage Yard, Buccaneer Enterprises,
Inc., Route 10, Box 393, Buckhannon, West Virginia.
1.20. Facility Site shall mean the Buccaneer Storage Yard, Buccaneer
Enterprises, Inc., Route 10, Box 393, Buckhannon, West Virginia, where the
Facility is currently stored.
1.21. Fixed Assets shall mean all tangible personal property currently
located at the Facility Site which constitute part of, or are otherwise owned
and used by Sellers in the operation of, the Facility, including, but not
limited to, all fixed assets, chattels, machinery, equipment, computer hardware,
fixtures, furniture, furnishings, handling equipment, implements, spare parts,
tools and accessories of all kinds which are listed on Schedule 1.21 attached
hereto; provided, however, that Fixed Assets shall exclude (a) leased items of
property and (b) the Excluded Assets.
1.22. GAAP shall mean generally accepted accounting principles of the
United States as applied by Sellers in a manner consistent with prior periods.
1.23. Holdback Amount shall have the meaning given to such term in
Section 2.2(a) hereof.
1.24. HSR Act shall mean the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
1.25. Improvements shall mean the structures, buildings and
improvements now standing on the Facility Site and constituting part of the
Facility, and replacements thereof, including, without limitation, all plant
equipment, apparatus, and machinery of every kind and nature forming a part of
such Facility, buildings, and improvements.
1.26. Initial Purchase Consideration shall have the meaning given to
such term in Section 2.2 hereof.
1.27. IRS shall mean the Internal Revenue Service
1.28. Knowledge of Buyer shall mean the actual knowledge, after due
inquiry, of any person listed on Schedule 1.28 attached hereto.
1.29. Knowledge of Sellers shall mean the actual knowledge, after due
inquiry, of any person listed on Schedule 1.29 attached hereto.
1.30. Law shall mean any federal, state, local or other law or
governmental requirement of any kind, and the rules, regulations and orders
promulgated thereunder.
3
<PAGE>
1.31. License and Binder Purchase Agreement shall mean that certain
License and Binder Purchase Agreement to be entered into by Buyer and Covol,
relating to the licensing by the Buyer of Covol's proprietary synthetic coal
fuel extrusion, pellet and briquette production process for the Facility, and
substantially in the form of Exhibit E attached hereto.
1.32. Lien shall mean any interest in property securing an obligation,
whether such interest is based on common law, statute or contract, and including
any restriction on the use, voting, transfer, receipt of income or other
exercise of any attributes of ownership, any security interest or lien arising
from a mortgage, claims, encumbrance, pledge, charge, easement, servitude,
security agreement, conditional sale or trust receipt or a lease, consignment or
bailment for security purposes. The term "Lien" shall also include reservations,
exceptions, covenants, conditions, restrictions, leases, subleases, licenses,
occupancy agreements, pledges, equities, charges, assessments, covenants,
reservations, defects in title, encroachments and other burdens, and other title
exceptions and encumbrances affecting property of any nature, whether accrued or
unaccrued, or absolute or contingent.
1.33. Loss shall have the meaning given to such term in Section 8.1(a).
1.34. Material Adverse Effect shall mean a material adverse effect on
the Assets and Contracts, taken as a whole, the business to be conducted by
Buyer with the Assets or the maintenance and operation of the Facility.
1.35. Opinion of Sellers' Counsel shall mean the opinion of Pillsbury,
Madison & Sutro, LLP, counsel to Sellers, and Harlan M. Hatfield, general
counsel of Covol Technologies, Inc., substantially in the form of Schedule 1.35.
1.36. Permitted Liens shall mean Liens (but only for amounts not yet
due and payable) securing taxes, assessments or governmental charges or levies,
Liens of an immaterial nature which could not reasonably be expected to have an
adverse effect on the maintenance and operation of the Facility or the good and
marketable title of the Assets or the enforceability of the Contracts, and Liens
disclosed on Schedule 1.36 attached hereto.
1.37. Plans and Specifications shall have the meaning given such terms
in the Contracts.
1.38. Product shall mean the solid synthetic fuel pellet product
produced at the Facility using and pursuant to the Covol Process.
1.39. Purchase Consideration shall have the meaning given to such term
in Section 2.2 hereof.
1.40. Required Consents shall mean those consents, approvals and
waivers required from parties to the Contracts or from governmental authorities
or other third parties that are necessary or required in order to transfer the
Assets and Contracts to Buyer and otherwise give effect to the transactions
contemplated herein (other than such consents, the failure of which to obtain,
taken as a whole, could not reasonably be expected to have a Material Adverse
Effect) and that are specifically identified on Schedule 1.40 attached hereto.
4
<PAGE>
1.41. Section 29 Product shall mean Product which is
reasonably expected to constitute "qualified fuels" pursuant to the terms of
Section 29(c)(1)(C) of the Code and with respect to which Section 29 is
applicable pursuant to the terms of Sections 29(f) and 29(g) of the Code.
1.42. Sellers' Closing Certificate shall mean the certificate of
Sellers substantially in the form of Exhibit D attached hereto.
1.43. Site shall mean the location designated by Buyer as provided
herein for delivery of the Assets by the Sellers.
1.44. Transaction Documents shall mean this Agreement, the Bill of
Sale, the Assignment Agreement, and those agreements and instruments to be
executed and delivered as provided in Section 2.3.
ARTICLE II
PURCHASE AND SALE
2.1. Purchase and Sale.
(a) Buyer and Sellers hereby agree that at the Closing, and
upon all of the terms and subject to all of the conditions of this Agreement,
Sellers shall sell, convey, transfer and assign to Buyer, and Buyer shall
purchase and accept from Sellers, all of the Assets, free and clear of all
Liens.
(b) Buyer and Sellers hereby agree that at the Closing, and
upon all of the terms and subject to all of the conditions of this Agreement,
Sellers shall assign to Buyer the Contracts and all rights arising thereunder.
2.2. Payment of the Initial Purchase Consideration; Holdback Amount.
(a) In consideration of Sellers' sale, conveyance, transfer,
delivery and assignment of the Assets and Contracts, at the Closing, Buyer shall
(i) pay to the Sellers Nine Million Six Hundred Eighty-Five Thousand Dollars
($9,685,000.00) (the "Initial Purchase Consideration") and (ii) hold in a
non-segregated account the amount of Three Hundred Fifteen Thousand Dollars
($315,000.00) (the "Holdback Amount"), which amount shall be disbursed in
accordance with Section 2.2(b) hereof. The Initial Purchase Consideration and
the Surplus (as defined below), if any (collectively, the "Purchase
Consideration"), shall be paid to the Sellers by wire transfer in readily
available funds to First Security Bank; Salt Lake City, Utah; 18A 124 000012;
for the account of Covol Technologies, Inc.; Acct. #0600019939.
(b) At the time of Sellers' delivery of the Assets to the
Site, Buyer shall inspect the Assets and notify Sellers, in writing, of any
missing equipment or damage to the Assets. Upon completion of the assembly of
the Facility (including any required repairs), Buyer shall present Seller with a
notice (the "Holdback Claim Notice") stating the costs of such repairs (the
"Holdback Claim"). The amount of the Holdback Claim shall be applied by Buyer
against the Holdback Amount by notice by Buyer to Sellers. If the amount of the
Holdback Claim made by Buyer is less than the Holdback Amount (the difference
being referred to herein as a "Surplus"), Buyer shall pay an amount equal to the
Surplus to Sellers within five days of the determination of the amount of the
Surplus. If the amount of the Holdback Claim made by Buyer is greater than the
Holdback Amount (the difference being referred to herein as a
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"Deficiency"), Sellers shall pay to Buyer the amount of such Deficiency within
five days of the determination of the amount of the Deficiency. Alternatively,
if the payment of the Deficiency is not paid by Sellers to Buyer within five
days of the determination of the amount of the Deficiency, Buyer shall have the
right to set-off the amount of the Deficiency against any royalty payments that
Buyer may become obligated to pay to Covol pursuant to Section 3 of the License
and Binder Purchase Agreement.
(c) Notwithstanding the foregoing, if Sellers notify Buyer of
their disagreement with the Holdback Claim Notice within seven business days of
receiving such notice, a committee consisting of two officers designated by
Buyer and two officers designated by Sellers shall meet and attempt in good
faith to resolve such dispute. If such committee does not resolve the dispute
within seven business days following their initial meeting, then a single third
party engineer (the "Third Party Engineer") shall be designated to consider and
decide the issues raised by such dispute, unless both parties determine that
further discussions by the committee are merited. The selection of such Third
Party Engineer shall be made from the list of engineers set forth in Schedule
2.2 attached hereto. In selecting the Third Party Engineer, each party (starting
with Sellers for the first dispute and alternating between Sellers and Buyer for
each dispute thereafter) shall alternate in deleting one name from the list of
engineers until only one such engineer shall remain, which remaining engineer
shall be the Third Party Engineer. The Third Party Engineer shall be designated
from such list not later than the third business day following the expiration of
the second seven business day period described above and such designation shall
become effective on the third business day following such designation. In the
event that the Third Party Engineer so designated does not or is unable to serve
as such, the selection process shall be commenced again until a replacement
Third Party Engineer is so designated. Within ten business days of the
effectiveness of the designation of a Third Party Engineer, each of the Buyer
and Sellers shall submit to the Third Party Engineer a notice (a "Position
Notice") setting forth in detail such party's position in respect of the issues
in dispute. Such Position Notice shall include supporting documentation, if
appropriate.
(d) The Third Party Engineer shall complete all proceedings
and issue its decision with regard to the issues in dispute, which decision
shall be binding on the parties, as promptly as reasonably possible, but in any
event within ten business days of the date on which both Position Notices are
submitted, unless the Third Party Engineer reasonably determines that additional
time is required in order to give adequate consideration to the issues raised.
In such case, the Third Party Engineer shall state in writing his reasons for
believing that additional time is needed and shall specify the additional period
required, which period shall not exceed ten days without the Buyer's and
Sellers' agreement.
2.3. Deliveries at Closing.
(a) By Sellers to Buyer. At the Closing, in addition to the
Assets, Sellers shall deliver the following items to Buyer, each properly
executed and dated as of the Closing Date by Sellers and in form and substance
reasonably acceptable to Buyer: (i) the Assignment
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Agreement, (ii) the Bill of Sale, (iii) the License and Binder Purchase
Agreement, (iv) all Required Consents applicable to Sellers, (v) the Opinion of
Sellers' Counsel, (vi) Sellers' Closing Certificate, (vii) the Acknowledgment
and Release, (viii) UCC-3 termination statements with respect to the Facility,
(ix) a certificate of insurance containing an endorsement, in form and substance
acceptable to Buyer, showing loss payment to Buyer as its interest may appear
and (x) a certificate of the corporate secretary of Sellers as to such matters
as may reasonably be requested by Buyer.
(b) By Buyer to Sellers. At the Closing, Buyer shall deliver
the Initial Purchase Consideration and the following items to Sellers, each
properly executed and dated as of the Closing Date by Buyer and in form and
substance reasonably acceptable to Sellers: (i) the Assignment Agreement, (ii)
the License and Binder Purchase Agreement, (iii) all Required Consents
applicable to Buyer, (iv) Buyer's Closing Certificate and (v) a certificate of
the corporate secretary (or equivalent official) of Buyer as to such matters as
may reasonably be requested by Sellers.
2.4. Allocation of Purchase Price.
On the Closing Date, or at a later time agreed to by the parties, not
to exceed 30 days following the Closing Date, the purchase price shall be
allocated among the Assets and Contracts in accordance with Exhibit F attached
hereto. Such allocation shall be intended to comply with the requirements of
Section 1060 of the Code, and no party shall take any position inconsistent with
such allocation for income tax purposes, except that Buyer's cost for the Assets
and Contracts may differ from the amount so allocated to the extent necessary to
reflect Buyer's capitalized acquisition costs other than the amount realized by
Sellers.
2.5. No Assumption of Liabilities.
Buyer does not and will not assume any liability or obligation of any
kind of Sellers, or any obligation relating to the use of the Assets or
performance by Sellers under the Contracts prior to the Effective Time, whether
absolute or contingent, accrued or unaccrued, asserted or unasserted, known or
unknown, or otherwise.
2.6. Sales Tax Exemption.
To the extent applicable, at the Closing, Buyer will deliver to Sellers
appropriate and customary sales tax exemption certificates relating to the
transfer of the Assets and the assignment of the Contracts contemplated hereby.
ARTICLE III
REPRESENTATION AND WARRANTIES OF SELLERS
Sellers jointly and severally represent and warrant to Buyer that:
3.1. Corporate Standing.
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Sellers are corporations or a limited liability company duly organized
and validly existing and in good standing under the laws of their states of
organization as indicated in the introductory paragraph of this agreement.
Sellers have the power to own their property, and to execute, deliver and
perform this Agreement and each of the Transaction Documents applicable to it,
and to carry on their business as now being conducted. Sellers are duly
qualified to do business in and are in good standing as foreign corporations or
limited liability companies, authorized to do business under the laws of the
State of West Virginia.
3.2. Authorizations; Binding Agreements.
The execution, delivery and performance of this Agreement and the other
Transaction Documents by Sellers and each conveyance, assignment, agreement, and
other document herein contemplated to be executed by Sellers, have been duly
authorized by all necessary corporate and limited liability company action, as
the case may be. This Agreement and the other Transaction Documents and the
conveyances, assignments, agreements, and other documents herein contemplated to
be executed, delivered and performed by Sellers are, or will be upon execution,
legal, valid and binding obligations of Sellers, duly enforceable against
Sellers in accordance with their terms (subject, however, to the effects of
bankruptcy, insolvency, reorganization, moratorium, and similar laws from time
to time in effect relating to the rights and remedies of creditors as well as to
general principles of equity). This Agreement and the other Transaction
Documents and the conveyances, assignments, agreements, and other documents
herein contemplated to be executed, delivered and performed by Sellers (i) do
not and will not result in any violation of, conflict with or default under the
terms of any of Sellers' organizational documents (nor, to the Knowledge of
Sellers, does there exist any condition which upon the passage of time or the
giving of notice would cause such violation, conflict or default), and (ii)
subject only to the Required Consents, do not and will not result in any
violation of, conflict with or default under any Contract or any other material
permit, lease, venture, indenture, mortgage, agreement, contract, judgment,
order or other obligation or restriction to which Sellers, the Assets, the
Contracts or the conduct of the maintenance and operation of the Facility may be
bound or encumbered (nor, to the Knowledge of Sellers, does there exist any
condition which upon the passage of time or the giving of notice would cause
such violation, conflict or default).
3.3. No Actions Affecting Enforcement of the Agreement and the other
Transaction Documents.
Except as set forth in Schedule 3.3, there are no actions, suits, or
proceedings pending, or, to the Knowledge of Sellers, threatened, against
Sellers in any court, or administrative governmental body or agency which will
affect in any adverse manner the ability of Sellers to execute, deliver and
perform this Agreement and the other Transaction Documents. Subject only to the
Required Consents and such consents which the failure to obtain could not
reasonably be expected to have a Material Adverse Effect, Sellers have obtained
all permits, licenses, franchises, authorizations, variances, exemptions,
concessions, leases, instruments, orders, consents or approvals of governmental
entities and third parties necessary to construct, maintain and operate the
Facility and to execute, deliver and perform this Agreement and the other
Transaction Documents.
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3.4. Taxes.
All tax returns and reports relating to the Assets, the Contracts and
the conduct of the construction, maintenance and operation of the Facility
required by law (including all federal, state, and local property tax, severance
and franchise tax laws) to be filed by Sellers prior to the Closing have been
timely filed or will be caused to be timely filed, including those tax returns
relating to periods prior to Closing that are not yet due, except for such
returns and reports which the failure to file could not reasonably be expected
to have a Material Adverse Effect on the Assets, the Contracts or the
maintenance and operation of the Facility. All taxes, assessments, fees,
interest, penalties and other governmental charges relating to the Assets, the
Contracts or the conduct of the construction, maintenance and operation of the
Facility prior to Closing have been paid when due and payable or payment has
been provided for, except for such taxes, assessments, fees, interest, penalties
and other governmental charges which the failure to pay could not reasonably be
expected to have a material adverse effect on the Assets, the Contracts or the
construction, maintenance and operation of the Facility.
3.5. Brokers or Finders Fees.
Except as set forth in Schedule 3.5, there is no obligation or
liability, contingent or otherwise, for brokers or finders fees created by
Sellers with respect to the matters provided for in this Agreement and the other
Transaction Documents. No obligation or liability for brokers or finders fees
created by Sellers with respect to the matters provided for in this Agreement
and the other Transaction Documents shall be imposed upon Buyer, the Assets or
the Contracts.
3.6. No Imposition of Liens.
The execution, delivery and performance of this Agreement and the other
Transaction Documents by Sellers shall not result in the imposition of any Lien,
other than Permitted Liens, upon any of the Assets, the Contracts or by which
the maintenance and operation of the Facility may be bound or encumbered.
3.7. Title to Assets.
Except as set forth on Schedule
3.7, as of the date hereof, Mountaineer Fuel, LLC owns, and as of the
Effective Time, it will own, good, valid and marketable title to all of the
Assets, free and clear of any and all Liens, except for Permitted Liens. As of
the Effective Time and upon Buyer's payment of the Purchase Consideration
pursuant hereto, good, valid and marketable title to the Assets and holds a
fully enforceable leasehold interest in the Facility Site, free and clear of all
Liens, except for Permitted Liens, shall pass to Buyer.
3.8. Condition of Assets.
Except as set forth on Schedule 3.8, as of the Closing Date, the Fixed
Assets, taken as a whole, will be in good operating condition and repair and
substantially fit for the production of Section 29 Product at a rate of 360,000
tons per year, and the Facility has been constructed in
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conformance with that degree of skill and judgment normally exercised by
recognized engineering and construction firms of similar size and experience to
that of the contractors under the Contracts, and the Assets comprising the
Facility conform to the standards of material and workmanship prevailing in
applicable industries and are free from material defects in design, material and
workmanship and are of good quality.
3.9. Pending Litigation.
Except as disclosed on Schedule 3.9, there are no actions, suits,
arbitrations or proceedings currently pending or, to the Knowledge of Sellers,
threatened against the Assets or the Contracts. There are no outstanding or
unsatisfied judgments, orders or decrees to which Sellers are bound.
3.10. Compliance With Laws.
To the Knowledge of Sellers, Sellers are in compliance with all orders,
writs, injunctions, decrees, judgments, rulings, laws, rules or regulations of
any governmental entity to which Sellers, the Assets or the Contracts are
subject, the violation of which could reasonably be expected to have a Material
Adverse Effect.
3.11. Status of Contracts.
Schedule 1.14 is a true, correct and complete list of all the material
contracts entered into by Sellers relating primarily to the Assets. Except as
described in the Schedule 3.11, the Contracts are valid and in good standing,
and there is no violation of, conflict with or default under the Contracts, the
consequence of which could reasonably be expected to have a Material Adverse
Effect. Sellers have not received any notice from any party to any Contract that
such party intends to terminate, cancel or refuse to renew the same or that such
party intends to offset any amount due thereunder or assert any defense to the
enforceability thereof.
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3.12. Consents.
Schedule 1.40 is a true, correct and complete list of all Required
Consents.
3.13. Books and Records.
As of the Closing Date, the Books and Records shall be complete and
correct in all material respects.
3.14. Environmental Conditions.
(a) Definitions. When used in this Section:
(i) "Environmental Laws" shall mean all applicable
laws (including common law), rules, orders, regulations, statutes, ordinances,
codes, decrees and requirements of any Governmental Authority regulating,
relating to or imposing liability standards of conduct concerning any Hazardous
Materials or environmental protection.
(ii) "Governmental Authority" shall mean any federal,
state, local, municipal or other governmental department, commission, board,
bureau, agency or instrumentality, or any court, in each case having
jurisdiction over the applicable matter.
(iii) "Hazardous Materials" shall mean any solid
waste, petroleum or petroleum product, hazardous material, hazardous waste,
infectious medical waste, or hazardous or toxic substance defined or regulated
as such in any Environmental Law.
(b) Environmental Representations and Warranties. Except as
set forth on Schedule 3.14 attached hereto:
(i) Sellers have not operated the Facility or
conducted business or other activities at or from the Facility, in connection
with the construction of the Facility or otherwise, in a manner that constituted
or constitutes a violation of any applicable Environmental Law;
(ii) There has been no off-site shipment or release
of any Hazardous Materials by the Sellers on, under, at, from or in any way
affecting the Facility or any part thereof, which off-site shipment or release
gives rise to liabilities or obligations under applicable Environmental Laws;
and
(iii) Sellers have not received any notices or claims
that they are a responsible party in connection with any claim or notice
asserted pursuant to 42 U.S.C. Section 9601 et seq., or any state superfund law,
in connection with the Facility.
(iv) Seller has received all permits as may be
required under applicable Environmental Laws to operate the Facility as of the
Effective Time, and Seller is in compliance in all material respects with the
terms and conditions of each such permits. Such permits shall be
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transferable to Buyer and will be effective immediately (or, subject to Section
5.1, as soon as practicable) after the Closing.
3.15. Liabilities.
Except for liabilities underlying any Permitted Liens, the Sellers have
no liabilities which could reasonably be expected to have a Material Adverse
Effect following the Closing, nor has any condition existed or any event
occurred which could reasonably be expected to give rise to any such liability.
3.16. Agreements with Related Persons.
There are no contracts, licenses, agreements or arrangements with any
Affiliate of Sellers in connection with the construction, maintenance, ownership
and operation of the Facility, other than as disclosed on Schedule 3.16.
3.17. Adequacy of the Purchased Assets.
Except as described in Schedule 3.8, the Assets and the Contracts,
together with (i) the technology and know-how being licensed to Buyer by Covol
under the License and Binder Purchase Agreement, (ii) the chemical binder to be
supplied to Buyer by Covol under the License and Binder Purchase Agreement, and
(iii) rights and assets required for the relocation of the Facility to the site
selected by Buyer (including but not limited to relocation construction
contracts, feedstock raw materials, applicable real property rights, permits,
etc.) which Buyer may arrange for but which are not the subject of this Purchase
Agreement, constitute all of the assets and technology rights reasonably
expected to be necessary for the production by Buyer of Section 29 Product at
the rate of 360,000 tons per year.
3.18. No Default.
Covol has not defaulted in the performance of any covenant, agreement
or condition contained in the Deed of Ground Lease, dated as of May 5, 1998,
between Upshur Property, Inc. and Covol (the "Lease"), and no event has occurred
and no condition exists or existed which, with the giving of notice or lapse of
time, or both, did or would constitute a default by Covol under the Lease. The
Lease terminated in accordance with its terms on September 24, 1999.
3.19. Production Capacity.
The Facility has a rated capacity to produce Product at the rate of
360,000 tons per year.
3.20. Section 29 Issues.
The Facility was placed "in service" for purposes of the Code prior to
July 1, 1998 pursuant to a binding contract entered into prior to January 1,
1997 and effective at all times thereafter.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Sellers that:
4.1. Organization and Standing.
Buyer is a limited liability company duly organized, validly existing,
and in good standing under the laws of the State of Delaware and has the power
to own its own property, and to execute, deliver and perform this Agreement and
each of the Transaction Documents, and to carry on its business as now being
conducted.
4.2. Authorizations; Binding Agreements.
The execution, delivery, and performance of this Agreement and the
other Transaction Documents by Buyer and of each conveyance, assignment,
agreement, and other document herein contemplated to be executed by Buyer have
been fully authorized by all necessary limited liability company action. This
Agreement and the other Transaction Documents and the conveyances, assignments,
agreements, and other documents herein contemplated to be executed, delivered
and performed by Buyer are, or will be upon execution, legal, valid and binding
obligations of Buyer, duly enforceable against Buyer in accordance with their
terms (subject, however, to the effects of bankruptcy, insolvency,
reorganization, moratorium, and similar laws from time to time in effect
relating to the rights and remedies of creditors as well as to general
principles of equity). This Agreement and the other Transaction Documents and
the conveyances, assignments, agreements, and other documents herein
contemplated to be executed, delivered and performed by Buyer (i) do not and
will not result in any violation of, conflict with or default under the terms of
Buyer's organizational documents, and (ii) subject only to the Required
Consents, do not and will not result in any violation of, conflict with or
default under any material permit, lease, venture, indenture, mortgage,
agreement, contract, judgment, order or other obligation or restriction to which
Buyer is bound (nor, to the Knowledge of Buyer, does there exist any condition
which upon the passage of time or the giving of notice would cause such
violation, conflict or default).
4.3. Brokers or Finders Fees.
No obligation or liability, contingent or otherwise, for brokers or
finders fees created by Buyer with respect to the matters provided for in this
Agreement shall be imposed upon Sellers.
4.4. No Action Affecting Enforcement of the Agreement and the other
Transaction Documents.
There are no actions, suits, or proceedings pending, or, to the
Knowledge of Buyer, threatened, against Buyer in any court, or administrative
governmental body or agency which will affect in any adverse manner the ability
of Buyer to execute, deliver and perform this Agreement and the other
Transaction Documents.
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ARTICLE V
CERTAIN UNDERSTANDINGS AND AGREEMENTS
5.1. Best Efforts.
Subject to the terms and conditions herein provided, each of the
parties hereto agrees to use its commercially reasonable efforts to take, or
cause to be taken, all action, and to do, or cause to be done, all things
necessary, proper and advisable under applicable Law, and to obtain the Required
Consents, necessary to consummate and make effective the transactions
contemplated by this Agreement. In case at any time after the Effective Time any
further action is necessary or desirable to carry out the purposes of this
Agreement, the proper officers and directors of each party to this Agreement
shall take all such necessary action. Buyer and Sellers will execute any
additional instruments necessary to consummate the transactions contemplated
hereby. To the extent that any permits referenced in Section 3.14(b)(iv) are not
transferred at the Closing Date, Sellers will use commercially reasonable
efforts to cause such transfer to Buyer as soon as practicable after the Closing
Date.
5.2. Public Announcements.
Buyer and Sellers will consult with each other before issuing any press
release or otherwise making any public statement with respect to this Agreement
and the transactions contemplated herein, and shall not issue any such press
release or make any such public statement prior to such consultation or as to
which the other party reasonably objects, except as may be required by Law or by
obligations pursuant to any listing agreement with any national securities
exchange or inter-dealer quotation system.
5.3. Confidentiality.
Notwithstanding the execution of this Agreement, the confidentiality
provisions of the Confidentiality Agreement shall remain in full force and
effect and shall survive the Closing.
5.4. Taxes.
Following Closing, Sellers shall timely file all tax returns and
reports relating to the Assets, the Contracts and the conduct of the
construction, maintenance and operation of the Facility prior to Closing which
have not been filed or were not yet due to be filed prior to Closing, and
Sellers shall timely pay all taxes, assessments, fees, interest, penalties and
governmental charges relating to the Assets, the Contracts or the conduct of the
construction, maintenance and operation of the Facility prior to Closing which
have not been paid or were not yet due and payable prior to Closing.
5.5. Private Letter Ruling Repurchase Option.
Following Closing, Buyer plans to seek a Private Letter Ruling from the
IRS as to matters relating to the Facility and Section 29 of the Code. Sellers
shall cooperate with and assist Buyer, as reasonably requested by Buyer, in
connection with seeking such Private Letter Ruling. In the event that Buyer does
seek such a Private Letter Ruling and the IRS refuses or fails to issue it in a
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form that is satisfactory in the sole and absolute discretion of Buyer, Buyer
shall be entitled to elect (by giving written notice to Sellers to such effect)
to terminate the obligation to make further royalty payments under Section 3 of
the License and Binder Purchase Agreement and, in such event, Sellers shall have
the option to purchase, within one year following such notice, the Assets and
Contracts (and assume obligations under the Contracts) from Buyer at the greater
of (i) the amount of Purchase Consideration theretofore paid by Buyer plus the
amount of any capital expenditures made by Buyer in connection with the Facility
and Assets plus any obligations of Buyer in respect of the Facility and the
Assets and Contracts, or (ii) the fair market value of such Assets and
Contracts.
5.6. Solvency Representations and Covenants.
Each Seller hereby represents and warrants (as to itself only) that
prior to consummating the transactions contemplated herein, (i) the aggregate
fair market value of such Seller's assets exceeds the aggregate amount of such
Seller's liabilities, including contingent liabilities discounted by the
probability of their occurrence, (ii) such Seller is able to pay and is paying
its debts generally as and when they become due in the ordinary course of
business, (iii) such Seller is adequately capitalized for its current and
contemplated business undertakings, and (iv) the Purchase Consideration
constitutes reasonably equivalent value and fair consideration for the Assets.
Each Seller hereby covenants (as to itself only) that after
consummating the transaction contemplated by the Purchase Agreement, (i) the
aggregate fair market value of such Seller's assets will exceed the aggregate
amount of such Seller's liabilities, including contingent liabilities discounted
by the probability of their occurrence, (ii) such Seller will be able to pay and
will pay its debts generally as and when they become due in the ordinary course
of business, and (iii) such Seller will not be left with unreasonably small
capital for its then-current and contemplated business undertakings.
5.7. Removal and Delivery of Facility.
As of the date hereof, Sellers and their contractors have disassembled
and stored the Facility at the Facility Site in preparation for Sellers'
relocation of the Facility to the Site. Sellers shall use their commercially
reasonable efforts to deliver the disassembled Facility and the other Assets to
Buyer at the Site within two weeks of written notice given by Buyer notifying
Sellers of the location of the Site. Except as provided below, all risk of loss
to the Assets shall pass to the Buyer upon the earlier to occur of (a)
acceptance of the Assets by Buyer at the Site or (b) the 121st day following the
Closing Date if the Assets are still located at the Facility Site; provided,
however, that, notwithstanding the foregoing, in all cases, all risk of loss to
the Assets shall be borne by Sellers during the transportation and delivery of
the Facility to the Site. In addition to the Initial Purchase Consideration set
forth in Section 2.2(a) herein, and subject to the provisions of Section 2.2(b)
hereof, Buyer shall reimburse Sellers for any reasonable and actual costs
incurred by Sellers for the disassembly, removal and transportation of the
Facility, not to exceed Seven Hundred and Fifty Thousand Dollars ($750,000),
within 30 days of the presentation of an invoice by Sellers therefore.
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5.8. Software Reinstallation.
Upon the reasonable request of Buyer, Covol agrees to provide from time
to time during the ____ day period following delivery of the Facility to Buyer
at the Site, the services of Brent Atkins (or his successor) in connection with
the reinstallation of the Facility Control Systems Software related to the
Facility.
ARTICLE VI
CONDITIONS PRECEDENT TO THE PAYMENT OBLIGATIONS OF BUYER
Each and every obligation of Buyer to be performed on the Closing Date
shall be subject to the satisfaction, prior to or at the Closing, of the
following express conditions precedent:
6.1. Compliance with Agreement.
Sellers shall have performed and complied in all material respects with
all of their obligations under this Agreement which are to be performed or
complied with by them prior to or on the Closing Date.
6.2. Proceedings and Instruments Satisfactory.
All proceedings, corporate or other, to be taken by Sellers in
connection with the transactions contemplated by this Agreement, and all
documents incident thereto, shall be reasonably satisfactory in form and
substance to Buyer.
6.3. No Litigation.
No investigation, suit, action or other proceedings (including, without
limitation, any petition relating to any of the Sellers under the Bankruptcy
Code or similar federal or state law) shall be threatened or pending before any
court or governmental agency that seeks restraint, prohibition, damages or other
relief in connection with this Agreement or the consummation of the transactions
contemplated hereby or in connection with obligations to creditors.
6.4. Representations and Warranties.
The representations and warranties made by Sellers in this Agreement
shall be true and correct in all respects (as to representations and warranties
qualified or limited by the term "Material Adverse Effect," the word "material,"
or phrases of like import), and in all material respects (as to representations
and warranties not so qualified or limited) as of the Closing Date with the same
force and effect as though said representations and warranties had been made on
the Closing Date.
6.5. Consents.
All Required Consents applicable to Sellers shall have been obtained.
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6.6. Tax Opinion.
Buyer shall have received an opinion of Hunton & Williams, counsel to
Buyer, in form and substance satisfactory to Buyer, with respect to matters
related to Section 29 of the Code.
6.7. Antitrust Filings.
The HSR Act and the regulations promulgated thereunder shall have been
complied with, and all waiting periods under the HSR Act shall have expired or
been terminated.
ARTICLE VII
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLERS
Each and every obligation of Sellers to be performed on the Closing
Date shall be subject to the satisfaction prior to or at the Closing of the
following express conditions precedent:
7.1. Compliance with Agreement.
Buyer shall have performed and complied in all material respects with
all of its obligations under this Agreement which are to be performed or
complied with by it prior to or on the Closing Date.
7.2. Proceedings and Instruments Satisfactory.
All proceedings, corporate or other, to be taken by Buyer in connection
with the transactions contemplated by this Agreement, and all documents incident
thereto, shall be reasonably satisfactory in form and substance to Sellers.
7.3. No Litigation.
No investigation, suit, action or other proceeding shall be threatened
or pending before any court or governmental agency that seeks restraint,
prohibition, damages or other relief in connection with this Agreement or the
consummation of the transactions contemplated hereby.
7.4. Representations and Warranties.
The representations and warranties made by Buyer in this Agreement
shall be true and correct in all respects (as to representations and warranties
qualified or limited by the term "Material Adverse Effect," the word "material,"
or phrases of like import), and in all material respects (as to representations
and warranties not so qualified or limited) as of the Closing Date with the same
force and effect as though such representations and warranties had been made on
the Closing Date.
7.5. Required Consents.
All Required Consents applicable to Buyer shall have been obtained.
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7.6. Antitrust Filings.
The HSR Act and the regulations promulgated thereunder shall have been
complied with, and all waiting periods under the HSR Act shall have expired or
been terminated.
ARTICLE VIII
INDEMNITIES AND ADDITIONAL COVENANTS
8.1. Sellers' Indemnity.
(a) Sellers hereby jointly and severally indemnify and hold
Buyer harmless from and against, and agree to defend promptly Buyer from, and
reimburse Buyer for, any and all losses, damages, costs, expenses, liabilities,
obligations and claims of any kind, including, without limitation, environmental
liabilities (whether involving personal injury or property damage), reasonable
attorneys' fees and other legal costs and expenses (hereinafter referred to
collectively as "Losses"), that Buyer and any Affiliate of Buyer may at any time
suffer or incur, or become subject to, as a result of or in connection with: (i)
any breach or inaccuracy of any of the representations and warranties made by
Sellers in this Agreement or any other agreement or instrument delivered by
Sellers pursuant hereto; (ii) any failure of Sellers to carry out, perform,
satisfy and discharge any of its covenants, agreements, undertakings,
liabilities or obligations under this Agreement or under any of the agreements
and instruments delivered by Sellers pursuant to this Agreement; (iii) claims by
third parties (including governmental authorities) against Buyer relating to the
construction, operation and ownership by Sellers of the Assets and the
performance by Sellers under the Contracts in each case under this clause (iii)
for the period prior to the Effective Time including, without limitation, any
claim of landlord's statutory lien; (iv) any violations of, or failure to
operate in accordance with, necessary permits prior to the Effective Time; and
(v) any and all liabilities and obligations of Sellers;
(b) In the event a claim against Buyer arises that Buyer
reasonably believes is covered by the indemnity provisions of Section 8.1(a) of
this Agreement, notice shall be given promptly by Buyer to Sellers containing
detail reasonably sufficient for Sellers to identify the nature and basis of the
claim. Provided that Sellers admit in writing to Buyer that such claim is
covered by the indemnity provisions of Section 8.1(a) hereof, Sellers shall have
the right to contest and defend by all appropriate legal proceedings such claim
and to control all settlements (unless Buyer agrees to assume the cost of
settlement and to forgo such indemnity) and to select lead counsel to defend any
and all such claims at the sole cost and expense of Sellers; provided, however,
that Sellers may not effect any settlement that could result in any cost,
expense or liability to Buyer unless Buyer consents in writing to such
settlement and Sellers agree to indemnify Buyer therefor. Buyer may select
counsel to participate with Sellers' counsel in any such defense, in which event
Buyer's counsel shall be at its own sole cost and expense. In connection with
any such claim, action or proceeding, the parties shall cooperate with each
other and provide each other with access to relevant books and records in their
possession.
(c) Sellers shall not be required to indemnify and hold
harmless Buyer pursuant to Section 8.1(a)(i) hereof in respect of the
representations and warranties made by Sellers herein unless such right to
indemnification is asserted by Buyer (whether or not such
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Losses have actually been incurred) by notice to Sellers within 12 months after
the Closing Date, with the exception of (i) the representations and warranties
set forth in Sections 3.4 and 3.20, which must be asserted by Buyer within the
applicable statute of limitations or any extensions thereof required by any
applicable authority relating to the taxes or assessments giving rise to the
Loss, plus 60 days, (ii) the representations and warranties set forth in Section
3.10, which must be asserted by Buyer within the applicable statute of
limitations for the violation of the underlying law that forms the basis of such
claim, plus 60 days, (iii) the representations and warranties set forth in
Sections 3.1, 3.2, and 3.7, which shall be without time limitation, and (iv) the
representations and warranties set forth in Section 3.14 hereof, which must be
asserted within 24 months after the Closing Date.
(d) Notwithstanding the foregoing, Sellers shall not be
required to indemnify Buyer under Section 8.1(a)(i) in respect of the
representations and warranties made by Sellers unless the amount of all Losses
for which indemnification is sought by Buyer under Section 8.1(a)(i) exceeds, in
the aggregate, $250,000, in which event, Sellers' indemnity obligation hereunder
would apply to all such Losses. Sellers' aggregate indemnification obligation
pursuant to Section 8.1(a)(i) shall in no event exceed the Purchase
Consideration described in Section 2.2 and paid to Sellers.
(e) The indemnification provided in this Section 8.1,
including the limitations with respect thereto, shall be the exclusive remedy
for Buyer with respect to Losses as a result of or in connection with the
matters described in Section 8.1(a)(i), notwithstanding any provisions in this
Agreement or any other such agreement or instrument to the contrary.
8.2. Buyer's Indemnity.
(a) Buyer hereby indemnifies and holds Sellers harmless from
and against, and agrees to defend promptly Sellers from and reimburse Sellers
for, any and all Losses that Sellers may at any time suffer or incur, or become
subject to, as a result of or in connection with: (i) any breach or inaccuracy
of any of the representations and warranties made by Buyer in this Agreement or
any other agreement or instrument delivered by Buyer pursuant hereto; (ii) any
failure by Buyer to carry out, perform, satisfy and discharge any of its
covenants, agreements, undertakings, liabilities or obligations under this
Agreement or under any of the agreements and instruments delivered by Buyer
pursuant to this Agreement; and (iii) claims by third parties (including
governmental authorities) against Sellers relating to the operation and
ownership by Buyer of the Assets for the period following the Effective Time.
(b) In the event a claim against Sellers arises that is
covered by the indemnity provisions of Section 8.2 of this Agreement, notice
shall be given promptly by Sellers to Buyer containing detail reasonably
sufficient for Buyer to identify the nature and basis of the claim. Provided
that Buyer admits in writing to Sellers that such claim is covered by the
indemnity provisions of Section 8.2 hereof, Buyer shall have the right to
contest and defend by all appropriate legal proceedings such claim and to
control all settlements (unless Sellers agrees to assume the cost of settlement
and to forgo such indemnity) and to select lead counsel to defend any and all
such claims at the sole cost and expense of Buyer; provided, however, that Buyer
may not effect any settlement that could result in any cost, expense or
liability to Sellers unless Sellers
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consents in writing to such settlement and Buyer agrees to indemnify Sellers
therefor. Sellers may select counsel to participate with Buyer's counsel in any
such defense, in which event Sellers' counsel shall be at the sole cost and
expense of Sellers. In connection with any such claim, action or proceeding, the
parties shall cooperate with each other and provide each other with access to
relevant books and records in their possession.
(c) Buyer shall not be required to indemnify and hold harmless
Sellers pursuant to Section 8.2(a)(i) hereof in respect of the representations
and warranties made by Buyer herein unless such right to indemnification is
asserted by Sellers (whether or not such Losses have actually been incurred) by
notice to the Buyer within 12 months after the Closing Date, with the exception
of the representations and warranties set forth in Sections 4.1 and 4.2 hereof,
which shall be without time limitation.
(d) Notwithstanding the foregoing, Buyer shall not be required
to indemnify Sellers under Section 8.2(a)(i) in respect of the representations
and warranties made by Buyer unless the amount of all Losses for which
indemnification is sought by Sellers under Section 8.2(a)(i) exceeds, in the
aggregate, $250,000, in which event, Buyer's indemnity obligation hereunder
would apply to all such Losses.
(e) The indemnification provided in this Section 8.2,
including the limitations with respect thereto, shall be the exclusive remedy
for Sellers with respect to Losses as a result of or in connection with the
matters described in Section 8.2(a)(i), notwithstanding any provisions in this
Agreement or any other such agreement or instrument to the contrary.
8.3. Bulk Sales Compliance.
To the extent applicable, Buyer hereby waives compliance by Sellers
with the provisions of the bulk sales law of any U.S. jurisdiction, and in any
event, Sellers covenants and agrees to pay and discharge when due all claims of
any governmental entities and creditors of Sellers and its subsidiaries that
could be asserted against Buyer by reason of such non-compliance. Sellers agree
to indemnify and hold Buyer harmless from and against and shall on demand
reimburse Buyer for any and all Losses suffered by Buyer by reason of Sellers'
failure to pay and discharge any such claims.
8.4. Additional Instruments.
At any time and from time to time after the Closing, at either party's
request and without further consideration, Sellers or Buyer, as the case may be,
shall execute and deliver such other instruments of sale, transfer, conveyance,
assignment and confirmation and take such other action as Sellers or Buyer may
reasonably deem necessary or desirable in order to more effectively transfer,
convey, and assign to Buyer, and confirm Buyer's title to and interest in and
responsibility and liability for, the Assets and Contracts and the consummation
of the transactions contemplated herein. Without limiting the generality of the
foregoing, Sellers will cooperate with and assist Buyer in renewing, or
transferring, into Buyer's name those Permits for which Buyer requests such
assistance and cooperation at the appropriate time for such renewal or transfer
as determined by Buyer.
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8.5. Access to Books, Records and Employees.
From and after the Closing Date, Buyer will authorize and permit
Sellers and its respective representatives to have access during normal business
hours, upon reasonable notice and for reasonable purposes and in such manner as
will not unreasonably interfere with the conduct of Buyer's business, to Books
and Records within the control of Buyer that relate to the Facility. From and
after the Closing Date, Sellers will authorize and permit Buyer and its
representatives to have access during normal business hours, upon reasonable
notice and for reasonable purposes and in such manner as will not unreasonably
interfere with the conduct of Sellers' business, to all books and records,
files, documents and other correspondence related to the Facility prior to the
Effective Time, which are not included among the Books and Records. Buyer and
Sellers agree to maintain all books, records, files, documents and other
correspondence related to the Facility prior to the Effective Time in accordance
with their respective normal document retention practices after the Closing
Date.
ARTICLE IX
TERMINATION
9.1. Termination.
This Agreement may be terminated and the transactions contemplated
hereby may be abandoned as follows: (a) at any time prior to the Closing Date by
mutual written agreement of Sellers and Buyer; or (b) by either Sellers or Buyer
if the Effective Time shall not have occurred on or before April 30, 2000;
provided, however, that the right to terminate this Agreement pursuant to this
clause (b) shall not be available to any party whose failure to fulfill any
obligation under this Agreement has been the cause of, or resulted in, the
failure of the Effective Time to occur prior to such date.
9.2. Rights on Termination; Waiver.
(a) If this Agreement is terminated pursuant to Section 9.1,
all further obligations of the parties under or pursuant to this Agreement shall
terminated.
(b) If any of the conditions set forth in Article VI of this
Agreement have not been satisfied, Buyer may nevertheless elect to waive such
conditions and proceed with the consummation of the transactions contemplated
hereby. If any of the conditions set forth in Article VII of this Agreement have
not been satisfied, Sellers may nevertheless elect to waive such conditions and
proceed with the consummation of the transactions contemplated hereby. The
election by Buyer or Sellers to terminate this Agreement pursuant to Section 9.1
(b) shall not in any way affect the rights of such party against the other party
for any breach or default under this Agreement.
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ARTICLE X
MISCELLANEOUS
10.1. Entire Agreement; Amendment.
This Agreement and the documents referred to herein and to be delivered
pursuant hereto constitute the entire agreement between the parties pertaining
to the subject matter hereof, and supersede all prior and contemporaneous
agreements, understandings, negotiations and discussions of the parties, whether
oral or written, and there are no warranties, representations or other
agreements between the parties in connection with the subject matter hereof,
except as specifically set forth herein or therein. No amendment, supplement,
modification, waiver or termination of this Agreement shall be binding unless
executed in writing by the party to be bound thereby. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of any
other provision of this Agreement, whether or not similar, nor shall such waiver
constitute a continuing waiver unless otherwise expressly provided. The
representations and warranties of each party hereto shall be deemed to be
material and to have been relied upon by the other party. The representations,
warranties, covenants and agreements of Sellers and Buyer contained herein shall
survive the execution and delivery of this Agreement and consummation of the
transactions contemplated hereby and, as to the representations and warranties,
shall be effective until the relevant time limitation for making any indemnity
claim with respect to such representations and warranties under Sections 8.1 and
8.2 and shall have been reached and no longer. All agreements, understandings,
representations, warranties and covenants made by Sellers herein shall be joint
and several obligations of Sellers.
10.2. Expenses.
Except as otherwise specifically provided herein, each of the parties
hereto shall pay the fees and expenses of their respective counsel, accountants
and other experts and the other expenses incident to the negotiation and
preparation of this Agreement and consummation of the transactions contemplated
hereby.
10.3. Governing Law; Consent to Jurisdiction.
This Agreement shall be construed and interpreted according to the laws
of the State of New York, without regard to the conflicts of law rules thereof;
provided, however, that Section 5-1401 of the New York General Obligations Law
shall apply to this Agreement. Each of the parties hereto, in respect of itself
and its properties, agree to be subject to (and hereby irrevocably submits to)
the nonexclusive jurisdiction of the United States federal court for the
Southern District of New York or New York state court sitting in the Borough of
Manhattan, New York, in respect of any suit, action or proceeding arising out of
or relating to this Agreement or the transactions contemplated herein, and
irrevocably agrees that all claims in respect of any such suit, action or
proceeding may be heard and determined in any such court. Each of the parties
hereto irrevocably waives, to the fullest extent it may effectively do so under
applicable Law, any objection to the laying of the venue of any such suit,
action or proceeding brought in any such court and any claim that any such suit,
action or proceeding brought in any such court has been brought in an
inconvenient forum. Either party hereto may make service on the other party by
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sending or delivering a copy of the process to the party to be served at the
address and in the manner provided for the giving of notices in Section 10.5
hereof. Nothing in this Section, however, shall affect the right of any party to
bring any action or proceeding arising out of or relating to this Agreement in
any other court or to serve legal process in any other manner permitted by law
or in equity.
10.4. Assignment.
This Agreement and each party's respective rights hereunder may not be
assigned, by operation of law or otherwise, without the prior written consent of
the other party provided, however, that Buyer may assign this Agreement to an
Affiliate of Buyer without the consent of Sellers.
10.5. Notices.
All communications, notices and disclosures required or permitted by
this Agreement shall be in writing and shall be deemed to have been given at the
earlier of the date (a) when delivered personally or by messenger or by
overnight delivery service to an officer of the other party, (b) five days after
being mailed by registered or certified United States mail, postage prepaid,
return receipt requested, or (c) when received via telecopy, telex or other
electronic transmission, in all cases addressed to the person for whom it is
intended at his address set forth below or to such other address as a party
shall have designated by notice in writing to the other party in the manner
provided by this Section:
If to Buyer: DTE Kentucky, LLC
425 South Main Street
Suite 201
Ann Arbor, Michigan 48104
Fax: (734) 668-9739
Attn: Manager of Assets
With a copy to: DTE Energy Services
425 South Main Street
Suite 201
Ann Arbor, Michigan 48104
Fax: (734) 668-1028
Attn: General Counsel
If to Sellers: Covol Technologies, Inc.
3280 North Frontage Road
Lehi, Utah 84043
Fax: (801) 766-1979
Attn: Brent M. Cook
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With a copy to: Covol Technologies, Inc. Pillsbury Madison & Sutro LLP
3280 North Frontage Road 235 Montgomery Street
Lehi, Utah 84043 San Francisco, CA 94104
Fax: (801) 766-1979 Fax: (415) 983-1200
Attn: General Counsel Attn: Linda C. Williams, Esq.
10.6. Counterparts; Headings.
This Agreement may be executed in several counterparts, each of which
shall be deemed an original, but such counterparts shall together constitute but
one and the same Agreement. The Table of Contents and Article and Section
headings in this Agreement are inserted for convenience of reference only and
shall not constitute a part hereof.
10.7. Interpretation.
Unless the context requires otherwise, all words used in this Agreement
in the singular number shall extend to and include the plural, all words in the
plural number shall extend to and include the singular and all words in any
gender shall extend to and include all genders. All references to contracts,
agreements, leases or other understandings or arrangements shall refer to oral
as well as written matters. The specificity of any representation or warranty
contained herein shall not be deemed to limit the generality of any other
representation or warranty contained herein.
10.8. Severability.
If any provision, clause or part of this Agreement, or the application
thereof under certain circumstances, is held invalid, the remainder of this
Agreement, or the application of such provision, clause or part under other
circumstances, shall not be affected thereby.
10.9. No Reliance.
No third party is entitled to rely on any of the representations,
warranties and agreements contained in this Agreement. Buyer and Sellers assume
no liability to any third party because of any reliance on the representations,
warranties and agreements of Buyer or Sellers contained in this Agreement.
Nothing contained in this Agreement shall be construed as creating a partnership
or joint venture or any agency relationship between the parties hereto, or any
other relationship other than buyer and Sellers as provided herein.
10.10. Parties in Interest.
This Agreement shall be binding upon and inure solely to the benefit of
each party hereto, and nothing in this Agreement, express or implied, is
intended to or shall confer upon any other person any rights, benefits or
remedies of any nature whatsoever under or by reason of this Agreement.
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10.11. Specific Performance.
The parties hereto agree that irreparable damage would occur in the
event any of the provisions of this Agreement were not performed in accordance
with the terms hereof and that the parties shall be entitled to specific
performance of the terms hereof, in addition to any other remedy at law or
equity.
[Remainder of this page intentionally left blank]
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IN WITNESS WHEREOF, each party hereto has caused this Purchase
Agreement to be executed in its name by a duly authorized officer as of the day
and year first above written.
DTE KENTUCKY, LLC
By: /s/ Kent L. McCargar
--------------------------------------
Its: Vice President and Chief Financial
Officer
COVOL TECHNOLOGIES, INC.
By: /s/ Kirk A. Benson
------------------------------------
Its: Chairman and Chief Executive Officer
SYNFUEL INVESTMENTS, INC.
By: /s/ Brent M. Cook
--------------------------------------
Its: President
MOUNTAINEER FUELS, LLC
By: /s/ Brent M. Cook, President
--------------------------------------
Covol Technologies, Inc.
Its: Manager
26
** This exhibit contains confidential material which has been omitted pursuant
to a Confidential Treatment Request. The omitted information has been filed
separately with the Securities and Exchange Commission.
LICENSE AND BINDER PURCHASE AGREEMENT
THIS LICENSE AND BINDER PURCHASE AGREEMENT (the "Agreement"), is made
and entered into as of April 17, 2000 by and between DTE Kentucky, LLC, a
Delaware limited liability company (the "Licensee"), and Covol Technologies,
Inc., a Delaware corporation (the "Licensor").
WHEREAS Licensor has developed a proprietary process to produce
synthetic coal fuel extrusions, pellets, and briquettes (collectively referred
to herein as "briquettes") from waste coal dust, coal fines and other coal
derivatives, and Licensor is entitled to license the synthetic Coal Briquetting
Technology (as defined below) to Licensee;
WHEREAS Licensor owns a synthetic fuel manufacturing plant (the
"Facility"), which is dismantled and stored at the Buccaneer Storage Yard,
Buccaneer Enterprises, Inc., Route 10, Box 393, Buckhannon, West Virginia and
Licensee has or will acquire the Facility from Licensor as contemplated by that
certain Asset Purchase Agreement, dated as of April 17, 2000, by and between
Licensee, Licensor, Mountaineer Fuel, LLC, a Utah limited liability company, and
Synfuel Investments, Inc., a Utah corporation, each subsidiaries of Licensor
(the "Purchase Agreement");
WHEREAS Licensee wishes to obtain and Licensor wishes to grant to
Licensee a license for the synthetic Coal Briquetting Technology to be used in
connection with the Facility on the terms and conditions set forth in this
Agreement, and Licensee wishes to obtain and Licensor wishes to sell to Licensee
the Proprietary Binder Material (as defined below) for use in the operation of
the Facility.
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants and agreements hereinafter set forth, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
Licensor and Licensee each agree as follows:
Section 1. Definitions.
"Coal Briquetting Technology" means all intellectual property, patents
(including, but not limited to, United States Patent Numbers 5,599,361;
5,487,764; and 5,453,103) and applications therefor, printed and not printed
technical data, know-how, trade secrets, copyrights and other intellectual
property rights, inventions, discoveries, techniques, works, processes, methods,
plans, software, designs, drawings, schematics, specifications, communications
protocols, source and object code and modifications, test procedures, program
cards, tapes, disks, algorithms and all other scientific or technical
information in whatever form including "Developed Technology" and "Improvements"
relating to, embodied in or used in the process to produce synthetic coal fuel
briquettes from waste coal dust, coal fines, run of mine coal, and other similar
coal derivatives, including all such information in existence as of the date of
this Agreement as well as related information later developed by Licensor;
provided, however, that the defined term "Coal Briquetting Technology" shall not
include the proprietary process/method or other binder material or composition
developed by Licensor to produce synthetic coke briquettes from coke breeze,
iron revert materials, or any technology used in any application other than the
processing
<PAGE>
and production of synthetic coal fuel briquettes. Nothing in this Agreement is
intended to grant to Licensee the right to apply the Coal Briquetting Technology
to produce anything other than synthetic coal fuel intended to qualify for tax
credits under Section 29(c)(1)(C) of the Internal Revenue Code.
"Code" means the Internal Revenue Code of 1986, as amended.
"Developed Technology" means any inventions, "Improvement," or
technology that Licensor may conceive, make, invent, or suggest in connection
with Licensor's disclosure to Licensee of the Coal Briquetting Technology, all
of which the parties hereto acknowledge and agree constitutes the sole and
exclusive property of Licensor. "Developed Technology" also means any
inventions, "Improvement," or new technology directly related to the Coal
Briquetting Technology that Licensor or Licensee may conceive, make, invent or
suggest relating to the Coal Briquetting Technology during the Term of this
Agreement; provided, however, that "Developed Technology" shall not include coal
fines recovery, coal fines washing, material handling, or product marketing
techniques or technologies conceived, made, invented, or suggested by Licensee
that are generally applicable to the coal industry but which are used at the
Facility in connection with the Coal Briquetting Technology.
"Effective Date" means the date of this Agreement set forth above.
"Facility" has the meaning set forth in the preamble.
"Improvement" means an alteration or addition to an invention or
discovery which may enhance performance or economics while maintaining a
product's, device's, or method's essential identity and character. An
"Improvement" may comprise alterations or additions to either patented or
unpatented inventions, discoveries, technology, or devices, and may or may not
be patentable; provided, however, that "Improvement" shall not include coal
fines recovery, coal fines washing, material handling, or product marketing
techniques or technologies conceived, made, invented, or suggested by Licensee
that are generally applicable to the coal industry but which are used at the
Facility in connection with the Coal Briquetting Technology.
"Licensee" has the meaning set forth in the preamble.
"Licensor" has the meaning set forth in the preamble.
"Proprietary Binder Material" means and refers to the binder compound
necessary for the production, by Licensee, of synthetic coal briquettes as
contemplated under the Purchase Agreement and which briquettes are reasonably
expected to constitute "qualified fuels" pursuant to the terms of Section
29(c)(1)(C) of the Code and with respect to which Section 29 is applicable
pursuant to Section 29(f) and 29(g) of the Code.
"Purchase Agreement" has the meaning set forth in the preamble.
"Royalty" has the meaning set forth in Section 3.
Section 2. License Grant.
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2.1 General. Licensor hereby grants to Licensee a non-exclusive license
to use the Coal Briquetting Technology, including Developed Technology and/or
Improvements relating to the Coal Briquetting Technology, throughout the term of
this Agreement, for the purpose of commercial exploitation, including the
non-exclusive right to make, have made or use at the Facility and to offer to
sell and to sell or otherwise transfer products that have been manufactured with
the Coal Briquetting Technology, subject to the terms and conditions of this
Agreement. Licensee hereby accepts the license on the terms hereof. Licensee
shall not have the right to sublicense the Coal Briquetting Technology.
2.2 Licensor's Ownership of Developed Technology. All Developed
Technology and/or Improvements are and shall become Licensor's absolute
property, subject to the terms of this Agreement. Licensee shall at any time
during the Term of this Agreement and thereafter, at Licensor's reasonable
request, execute any patent papers covering such Developed Technology and/or
Improvements as well as any other documents that Licensor may consider necessary
or helpful in the prosecution of applications for a patent thereon or in
connection with any litigation or controversy related thereto; provided,
however, that all expenses incident to the filing of such applications and the
prosecution thereof and the conduct of such litigation shall be borne by
Licensor.
2.3 Exclusive Technology. Licensee agrees to use only the Coal
Briquetting Technology at the Facility and not to use any other technology at
the Facility, except to the extent other or additional technology is necessary.
Licensee shall not use any process or methodology that is not part of the Coal
Briquetting Technology, except to the extent that other or additional technology
is necessary. Licensee (a) shall not make or have made products using the Coal
Briquetting Technology or similar technology except at the Facility and (b)
shall only make and have made products using the Coal Briquetting Technology at
the Facility under this License Agreement, except to the extent other or
additional technology is necessary. Licensee further agrees to use the Coal
Briquetting Technology only under authority of this License Agreement with
Licensor. Notwithstanding the foregoing, Licensee may produce Section 29 Product
at the Facility without the use of the Proprietary Binder Material and with
binder material provided elsewhere subject to the requirement to pay the
additional royalty provided in Section 3.1 hereof.
2.4 Non-licensed Technology. Licensor retains the absolute right to
fully exploit its technologies including, but not limited to, the application of
such technology embodied in the Coal Briquetting Technology to produce, market
and use synthetic coke briquettes from coke breeze, iron revert materials, and
any other materials to which Licensor's technology can be applied.
2.5 Confidentiality. Each of the parties hereby agree to maintain the
Coal Briquetting Technology confidential and not to disclose the Coal
Briquetting Technology, or any aspect thereof, including the Developed
Technology or Improvements (collectively, the "Confidential Information").
Notwithstanding the foregoing, information which (a) is or becomes generally
available to the public other than as a result of an unauthorized disclosure by
the parties or their respective agents, employees, directors or representatives,
(b) was available to the party receiving disclosure on a non-confidential basis
prior to its receiving disclosure hereunder, (c) lawfully becomes available to
the party receiving disclosure on a non-confidential basis from a third party
source (provided that such source is not known by the party receiving disclosure
or its agents,
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employees, directors or representatives to be prohibited from transmitting the
information), or (d) a party is compelled by legal process by any court or other
authority to disclose shall not be subject to the terms of this Section 2.5. In
the case of (d) above, the compelled party shall give the other party prompt
written notice of such legal process in order that an appropriate protective
order can be sought and each party agrees not to oppose the other party's
efforts to prevent the disclosure of Confidential Information. At the
termination of this Agreement, all copies of any Confidential Information
(including, without limitation, any reports or memoranda) shall be returned by
the party receiving disclosure. Nothing in this Agreement shall prohibit
Licensee from disclosing the Confidential Information to others as may be
reasonably necessary for Licensee to exploit Licensee's rights under the
Purchase Agreement, and/or this Agreement; provided that the recipient of any
such Confidential Information executes a Confidentiality Agreement restricting
further disclosure of the Confidential Information.
2.6 Know-How and Assistance. To enable Licensee to benefit fully from
the license of the Coal Briquetting Technology, Licensor shall provide access to
all relevant documentation, drawings, engineering specifications and other
know-how in its possession, reasonable access to its employees or agents who are
familiar with the Coal Briquetting Technology, Developed Technology, and
Improvements and shall provide such technical assistance and training as is
requested by Licensee. If Licensor does not have responsibility for the
operation of the Facility, Licensee shall reimburse Licensor for reasonable
travel and other similar out-of-pocket expenses of Licensor in performing
services under this Section 2.6; provided however, that Licensor shall obtain
the prior approval of Licensee for any expenditures in excess of $5,000.
Section 3. Royalty.
3.1 Royalty Payments. During the term of this Agreement, Licensee shall
pay to Licensor a royalty in an amount equal to $** per ton for the first
360,000 tons per calendar year, and $** per ton for all tons in excess of
360,000 tons in a calendar year, of Section 29 Product produced at the Facility
and sold during the period commencing on the effective date hereof and ending
upon the expiration of the term (or earlier termination) of this Agreement. Such
royalty shall be paid quarterly on the last day of January, April, July and
October of each year for the Section 29 Product sold during the previous
calendar quarter. In the event that, during the term of this Agreement, Licensee
elects to use a binder material other than the Proprietary Binder Material,
Licensee will pay an additional royalty to Licensor in the amount of $** per ton
of Section 29 Product produced at the Facility, without the Proprietary Binder
Material, and sold to any third-party customer.
4
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Section 4. Sales of Binder.
4.1 Sale and Purchase. Licensor shall sell to Licensee, and Licensee
shall purchase from Licensor, all of Licensee's requirements of Proprietary
Binder Material required to operate the Facility. Licensor shall deliver the
Proprietary Binder Material at such times and in such amounts as requested by
Licensee. Licensor shall invoice Licensee for Proprietary Binder Material
monthly. Payments for Proprietary Binder Material delivered by Licensor during
any calendar month shall be due and payable to Licensor on the tenth business
day of the immediately succeeding month.
4.2 Price. The price which Licensee shall pay for the Proprietary
Binder Material delivered by Licensor shall be an amount equal to (a) Licensor's
direct and actual costs (including, but not limited to, material, labor, and
transportation costs) and a percentage of the total overhead costs of Licensor
reasonably reflecting the ratio of the administrative costs incurred in
connection with the manufacture and sale of the Proprietary Binder Material
(estimated at the date hereof to be $** per unit of Proprietary Binder Material
necessary to create one (1) ton of synthetic fuel product), payable within 30
days of receipt of an invoice therefor, plus (b) ** ($**) per unit of
Proprietary Binder Material necessary to create one (1) ton of synthetic fuel
product, payable for the preceding calendar quarter on the last day of January,
April, July and October of each year.
4.3 Licensor Representations and Warranties. Licensor represents,
warrants and covenants as follows:
(a) Licensor shall convey to Licensee good title to all
Proprietary Binder Material purchased by Licensee from Licensor hereunder, free
and clear of any and all liens, claims and encumbrances of any type whatsoever.
(b) No Proprietary Binder Material shall contain any hazardous
material in violation of applicable laws and governmental regulations.
(c) At Licensee's reasonable request, Licensor shall replace,
or refund the purchase price of, all non-conforming Proprietary Binding
Material.
(d) Proper use of the Coal Briquetting Technology, including
use at an adequate, qualified Facility and with adequate feedstocks and other
raw materials, will enable Licensor to produce a product which is reasonably
expected to constitute "qualified fuels" pursuant to the terms of Section
29(c)(1)(C) of the Code.
4.4 Order Procedure. Licensee shall deliver all purchase orders for
Proprietary Binder Material at least thirty (30) days in advance of the first
day of the month in which delivery of such Proprietary Binder Material is
required under such purchase order. (For example, Licensee shall deliver a
purchase order for December delivery by no later than November 1st). Each such
purchase order shall be delivered either (a) in writing (including by fax), or
(b) orally by telephone by an authorized agent of Licensee (subject to the
condition that it is followed by a
5
<PAGE>
written purchase order within 24 hours). Such purchase orders shall be sent to
Licensor at such address as Licensor shall direct.
4.5 Delivery and Acceptance. All Proprietary Binder Material purchased
hereunder shall be delivered F.O.B. the Facility. Licensor shall arrange for any
necessary transportation of the Proprietary Binder Material to the Facility.
Licensee shall bear the expense of unloading the Proprietary Binder Material
from the trucks. Licensee shall have a reasonable opportunity to sample
Proprietary Binder Material delivered to it hereunder to confirm that such
Proprietary Binder Material conforms to the terms and requirements hereof, and
Licensee shall not be deemed or required to accept any such Proprietary Binder
Material prior to the completion of such sampling.
4.6 Delivery of Binder Material. If Licensor's ability to deliver the
Proprietary Binder Material to Licensee will be interrupted or terminated for
any reason, Licensor shall give not less than ninety (90) days notice to
Licensee. Subject to giving notice of its inability to deliver the Proprietary
Binder Material to Licensee (or, in the absence of such notice, the actual
failure to deliver the Proprietary Binder Material for at least twenty (20) days
after Licensee gives written notice of non-delivery to Licensor), Licensor
hereby grants to Licensee a nonexclusive license for the term of this Agreement
(or such shorter period as provided in the proviso hereto) to use the technology
used to manufacture the Proprietary Binder Material, and the copy of the Formula
delivered in escrow pursuant to Section 4.7, to manufacture the Proprietary
Binder Material in sufficient quantities to operate the Facility to full
capacity, and such technology shall be deemed "Coal Briquetting Technology" for
the purposes of this Agreement; provided, however, that the license granted to
Licensee under this Section 4.6 shall cease (subject to reinstatement upon the
reoccurrence of the events contemplated above) and sales of Proprietary Binder
Material under the terms of this Agreement shall be reinstated, in each case, on
a date not less than ninety (90) days after Licensor gives notice to Licensee,
together with evidence reasonably satisfactory to Licensee that Licensor is able
to deliver the Proprietary Binder Material in accordance with this Agreement. No
additional fee or royalty shall be payable to Licensor in connection with the
License granted pursuant to this Section 4.6 and Licensor shall be responsible
for any additional out-of-pocket costs incurred by Licensee in connection with
the production of Proprietary Binder Material pursuant to this Section 4.6.
4.7 Escrow of Binder Material Formula. As a material inducement for
Licensee entering into this Agreement and for the Buyer under the Purchase
Agreement entering into the Purchase Agreement, and in order to provide
assurance to Licensee of access to an adequate and continuing supply of the
Proprietary Binder Material during the term of this Agreement, Licensor agrees
to place in escrow with Licensee the formula and technology used to manufacture
the Proprietary Binder Material (the "Formula") as provided herein. In
connection therewith, Licensor agrees to deposit with Licensee, within ten (10)
days of the date of this Agreement, a copy of the Formula. During the term of
this Agreement, Licensor shall keep the Formula in escrow fully current by
depositing all updates and revisions thereto and related materials, as the
Formula may be updated or revised from time to time. Such supplemental deposits
will be completed no later than ten (10) days after the date of use of such
revised Formula by Licensor. Title to the Formula shall remain in Licensor, but
title to the copy thereof to be deposited in escrow hereunder shall, in the
event the Formula shall be released for use to Licensee as provided in Section
4.6, pass to and vest in Licensee. Licensee shall hold such copy of the Formula
and
6
<PAGE>
any supplements in a safe-deposit box at a financial institution located in the
Detroit/Ann Arbor, Michigan region designated by Licensee and reasonably
approved by Licensor. Notwithstanding its ownership of a copy of the Formula in
such event, Licensee's use of the Formula shall remain subject to the terms of
this Agreement.
Section 5. Records; Inspection; Confidentiality. Each party hereto
shall keep accurate records containing all data reasonably required for the
computation and verification of the amounts to be paid by the respective parties
under this Agreement, and shall permit each other party or an independent
accounting firm designated by such other party to inspect and/or audit such
records during normal business hours upon reasonable advance notice. All costs
and expenses incurred by a party in connection with such inspection shall be
borne by it. Each party agrees to hold confidential from all third parties all
information contained in records examined by or on behalf of it pursuant to this
Section 5; provided, however, that information which (a) is or becomes generally
available to the public other than as a result of an unauthorized disclosure by
the parties or their respective agents, employees, directors or representatives,
(b) was available to the party receiving disclosure on a non-confidential basis
prior to its receiving disclosure hereunder, (c) lawfully becomes available to
the party receiving disclosure on a non-confidential basis from a third party
source (provided that such source is not known by the party receiving disclosure
or its agents, employees, directors or representatives to be prohibited from
transmitting the information), or (d) a party is compelled by legal process by
any court or other authority to disclose shall not be subject to the terms of
this Section 5. In the case of (d) above, the compelled party shall give the
other party prompt written notice of such legal process in order that an
appropriate protective order can be sought and each party agrees not to oppose
the other party's efforts to prevent the disclosure of such information. At the
termination of this Agreement, all copies of such information (including,
without limitation, any reports or memoranda) shall be returned by the party
receiving disclosure.
Section 6. Enforcement of Proprietary Rights. Licensee shall cooperate
in good faith, with Licensor's efforts to enforce its proprietary patent and
trade secret rights.
Section 7. General Representations and Warranties.
7.1 Authority. Each of Licensee and Licensor represents and warrants
that (a) the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
on its behalf by all requisite action, corporate or otherwise, (b) it has the
full right, power and authority to enter into this Agreement and to carry out
the terms of this Agreement, (c) it has duly executed and delivered this
Agreement, and (d) this Agreement is a valid and binding obligation of it
enforceable in accordance with its terms.
7.2 No Consent. Each of Licensee and Licensor represents and warrants
that no approval, consent, authorization, order, designation or declaration of
any court or regulatory authority or governmental body or any third-party is
required to be obtained by it, nor is any filing or registration required to be
made therewith by it for the consummation by it of the transactions contemplated
under this Agreement.
7.3 Intellectual Property Matters. Licensor represents and warrants
that (a) it owns, free and clear of all liens and encumbrances, patents related
to the Coal Briquetting Technology
7
<PAGE>
(including, but not limited to, United States Patent Numbers 5,599,361,
5,487,764 and 5,453,103) and has developed the Coal Briquetting Technology,
including, but not limited to, printed and not printed technical data, know-how,
trade secrets, copyrights, and other intellectual property rights and all other
scientific or technical information in whatever form relating to, embodied in or
used in the process to produce synthetic coal fuel briquettes from waste coal
dust, coal fines, run of mine coal and other similar coal derivatives, and, the
right to freely make, use, sell and exploit Proprietary Binder Material used in
manufacturing synthetic coal fuel briquettes from waste coal dust, coal fines
and other similar coal derivatives, (b) it has the right and power to grant to
Licensee the licenses granted herein, and (c) the sale or use of the rights,
Proprietary Binder Material and/or licenses granted herein as contemplated by
this Agreement will not infringe any third-party's intellectual property rights.
7.4 Indemnification. Each party agrees to indemnify, defend and hold
harmless the other party and its partners, directors, officers, members, agents,
representatives, subsidiaries and affiliates from and against any and all
claims, demands or suits (by any party, including any governmental entity),
losses, liabilities, damages, obligations, payments, costs and expenses
(including the costs and expenses of enforcing this indemnification and
defending any and all actions, suits, proceedings, demands and assessments,
which shall include reasonable attorneys' fees and court costs) resulting from,
relating to, arising out of, or incurred in connection with any breach of any of
the representations, warranties and/or covenants contained in this Agreement.
Section 8. Term. The term of this Agreement is for the period
commencing on the Effective Date of this Agreement and ending on the later of
(a) 31 December 2007, (b) the full term of Section 29 of the Code, or (c) the
last to expire of the U.S. patents in existence at the Effective Date of this
Agreement that disclose and claim Covol's proprietary Coal Briquetting
Technology as defined herein. Any extension of this Agreement must be in
writing, signed by both parties.
Section 9. Termination. This Agreement shall terminate upon the
termination date set forth in Section 8, unless the Agreement is terminated
sooner pursuant to this Section 9.
9.1 Termination for Cause. In addition to any other remedies that may
exist, either party may terminate this Agreement for cause in the event the
other party commits a material breach of any provision of this Agreement by
giving the other party at least sixty (60) days prior written notice of such
termination, unless such default or breach is cured within said sixty (60) days.
If either party terminates this Agreement pursuant to this Section 9, Licensee
shall promptly return and cause all agents of Licensee to promptly return to
Licensor all Confidential Information and all Coal Briquetting Technology then
in Licensee's possession, and Licensee shall not thereafter use for its own
commercial benefit or disclose to any third person any Confidential Information
or Coal Briquetting Technology during the period ending three (3) years from the
date of such termination. Notwithstanding the foregoing, information which (a)
is or becomes generally available to the public other than as a result of an
unauthorized disclosure by the Licensee or its respective members, agents,
employees, directors or representatives, (b) was available to the Licensee on a
non-confidential basis prior to its receiving disclosure hereunder, (c) lawfully
becomes available to the Licensee on a non-confidential basis from a third party
source (provided that such source is not known by the Licensee or its members,
agents, employees, directors or representatives to be prohibited from
transmitting the information), or (d) the Licensee is
8
<PAGE>
compelled by legal process by any court or other authority to disclose shall not
be subject to the terms of the duty to protect Confidential Information set
forth in this section. In the case of (d) above, the Licensee shall give the
Licensor prompt written notice of such legal process in order that an
appropriate protective order can be sought and Licensee agrees not to oppose
Licensor's efforts to prevent the disclosure of Confidential Information.
9.2 Termination for Insolvency or Ceasing Business. This Agreement may
be terminated by either party if:
(a) The other party becomes insolvent or is unable to pay its debts
as they fall due, seeks protection voluntarily or involuntarily under any law
relating to bankruptcy, receivership, insolvency, administration, liquidation,
dissolution or similar law of any jurisdiction (other than for the purposes of a
reorganization with a view to continuing the business as a going concern under
relevant bankruptcy or insolvency proceedings) or enters into a general
assignment or arrangement or a composition with or for the benefit of its
creditors; or
(b) The other party takes any step (including the filing or
presentation of a petition, the convening of a meeting or the filing of an
application or consent) in any jurisdiction for, or with a view to, the
appointment of an administrator, liquidator, receiver, trustee, custodian or
similar official (other than for the purposes of a reorganization with a view to
continuing the business as a going concern under relevant bankruptcy or
insolvency proceedings) for such party and/or the whole or any part of the
business, undertaking, property, assets, receiver or uncalled capital of such
party Licensee or any such person is appointed.
9.3 Effect of Termination. Upon termination of this Agreement, all
rights granted to and future obligations of the parties shall immediately cease;
however termination shall not relieve either party of its obligations accrued
during the term of this Agreement (including any pre-termination obligation
Licensee may have to pay Licensor) which has not been fulfilled, and all
representations, warranties, indemnification obligations and confidentiality
agreements made herein shall survive termination of this Agreement.
Section 10. Effectiveness of Certain Provisions. Notwithstanding
anything herein to the contrary, Licensee shall not be obligated under Sections
2.3, 3.1 or 4.1 hereof unless and until Licensee has entered into binding
agreements with a third party to relocate and place the Facility at a suitable
location and to sell the output of the Facility, all pursuant to terms and
conditions mutually acceptable to Licensee and a third party.
Section 11. Waiver. The failure of any party to enforce at any time any
provision of this Agreement shall not be construed as a waiver of such provision
or the right thereafter to enforce each and every provision. No waiver by any
party, either express or implied, of any breach of any of the provisions of this
Agreement shall be construed as a waiver of any other breach of such term or
condition.
Section 12. Severability. If any provision of this Agreement shall be
held by a court of competent jurisdiction to be invalid or unenforceable in any
respect for any reason, the validity and enforceability of any such provision in
any other respect and of the remaining provisions of this Agreement shall not be
in any way impaired.
9
<PAGE>
Section 13. Notices. All notices required or authorized by this
Agreement shall be effective upon receipt and given to the parties in writing by
fax, mail, or courier as follows:
To Licensor: Brent M. Cook, President
Covol Technologies, Inc.
3280 North Frontage Road
Lehi, Utah 84043
Fax: (801) 768-4481
To Licensee: DTE Kentucky, LLC
425 South Main Street
Suite 201
Ann Arbor, Michigan 48104
Fax: (734) 668-9739
Attn: Manager of Assets
With a copy to: DTE Energy Services, Inc.
425 South Main Street
Suite 201
Ann Arbor, Michigan 48104
Fax: (734) 668-1028
Attn: General Counsel
Section 14. Remedies Cumulative. Remedies provided under this Agreement
shall be cumulative and in addition to other remedies provided by law or in
equity.
Section 15. Entire Agreement. This Agreement, together with the
Transaction Documents (as defined in the Purchase Agreement), constitutes the
entire agreement of the parties relating to the subject matter hereof. There are
no promises, terms, conditions, obligations, or warranties other than those
contained herein and therein. This Agreement and the Transaction Documents
supersede any and all prior communications, representations, or agreements,
verbal or written, between the parties relating to the subject matter hereof.
This Agreement may not be amended except in writing signed by the parties
hereto.
Section 16. Governing Law. This Agreement shall be governed in
accordance with the laws of the State of New York, exclusive of its conflict of
laws rules.
Section 17. Assignment. This Agreement may not be assigned, in whole or
in part, by any party without the written consent of the other party, which
consent shall not be unreasonably withheld, except that Licensor and Licensee
shall have the right to assign their respective rights and obligations under
this Agreement to any entity which is controlled by Licensor or Licensee, as the
case may be, and of which Licensor or Licensee, as the case may be, owns,
directly or indirectly, at least fifty percent (50%) of each class of its
outstanding securities, provided that no such assignment shall release Licensor
or Licensee, as the case may be, from their respective obligations hereunder.
[Remainder of page intentionally left blank]
10
<PAGE>
Executed by the duly authorized representative of the parties on the
date and year first above written.
COVOL TECHNOLOGIES, INC. DTE KENTUCKY, LLC
By: /s/ Kirk A. Benson By: /s/ Kent L. McCargar
---------------------------- -------------------------------
Name: Kirk A. Benson Name: Kent L. McCargar
Its: CEO Its: Vice President and Chief
Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE SIX MONTHS ENDED MARCH 31,
2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> MAR-31-2000
<CASH> 9,172
<SECURITIES> 0
<RECEIVABLES> 11,752
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 34,238
<PP&E> 7,210
<DEPRECIATION> 3,549
<TOTAL-ASSETS> 49,818
<CURRENT-LIABILITIES> 18,538
<BONDS> 15,357
0
1
<COMMON> 22
<OTHER-SE> 8,686
<TOTAL-LIABILITY-AND-EQUITY> 49,818
<SALES> 3,236
<TOTAL-REVENUES> 18,948
<CGS> 4,517
<TOTAL-COSTS> 4,517
<OTHER-EXPENSES> 12,552
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,766
<INCOME-PRETAX> (2,789)
<INCOME-TAX> (3,000)
<INCOME-CONTINUING> 211
<DISCONTINUED> 0
<EXTRAORDINARY> (1,823)
<CHANGES> 0
<NET-INCOME> (1,612)
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>