UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 NO. 0-21911
SYNTROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 73-1565725
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
------------------------------ -------------------
1350 SOUTH BOULDER, SUITE 1100
TULSA, OKLAHOMA 74119-3295
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (918) 592-7900
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 __.
--
At May 3, 2000, the number of outstanding shares of the issuer's common stock
was 27,361,197.
<PAGE>
SYNTROLEUM CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
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PART I - FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements.
Unaudited Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Unaudited Consolidated Statements of Operations for the three month
periods ended March 31, 2000 and 1999 . . . . . . . . . . . . . . . . 2
Unaudited Consolidated Statements of Stockholders' Equity for the three
month period ended March 31, 2000 . . . . . . . . . . . . . . . . . . 3
Unaudited Consolidated Statements of Cash Flows for the three month
periods ended March 31, 2000 and 1999 . . . . . . . . . . . . . . . . 4
Notes to Unaudited Consolidated Financial Statements. . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 14
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . . 14
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . 14
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 14
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
INDEX TO EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements as
well as historical facts. These forward-looking statements include statements
relating to the Syntroleum Process and related technologies, gas-to-liquids
plants based on the Syntroleum Process, anticipated costs to design, construct
and operate these plants, the timing of commencement and completion of the
design and construction of these plants, obtaining required financing for these
plants, the economic construction and operation of gas to liquids plants, the
value and markets for plant products, testing, certification, characteristics
and use of plant products, the continued development of the Syntroleum Process
(alone or with partners), anticipated capital expenditures, anticipated
revenues, the sale of and costs associated with our real estate inventory and
any other statements regarding future growth, cash needs, operations, business
plans and financial results. When used in this document, the words
"anticipate," "believe," "estimate," "expect," "intend," "may," "plan,"
"project," "should" and similar expressions are intended to be among the
statements that identify forward-looking statements. Although we believe that
the expectations reflected in these forward-looking statements are reasonable,
these kinds of statements involve risks and uncertainties. Actual results may
not be consistent with these forward-looking statements. Important factors that
could cause actual results to differ from these forward-looking statements
include the risks that the cost of designing, constructing and operating
commercial-scale gas to liquids plants will exceed current estimates,
commercial-scale gas to liquids plants will not achieve the same results as
those demonstrated on a laboratory or pilot basis, gas to liquids plants may
experience technological and mechanical problems, improvements to the Syntroleum
Process currently under development may not be successful, plant economics may
be adversely impacted by operating conditions, including energy prices,
construction risks and risks associated with investments and operations in
foreign countries, our ability to implement corporate strategies, competition,
intellectual property risks, our ability to obtain financing and other risks
described in this Quarterly Report on Form 10-Q and Syntroleum's Annual Report
on Form 10-K for the year ended December 31, 1999.
As used in this Quarterly Report on Form 10-Q, the terms "we," "our" or "us"
mean Syntroleum Corporation, a Delaware corporation, and its predecessors and
subsidiaries, unless the context indicates otherwise.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SYNTROLEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
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ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 18,667 $ 20,316
Short-term investments 3,441 3,565
Accounts and notes receivable 173 1,193
Other current assets 343 365
--------- ---------
Total current assets 22,624 25,439
REAL ESTATE HELD FOR SALE 23 2,665
REAL ESTATE UNDER DEVELOPMENT 3,163 3,349
INVESTMENTS 1,155 1,104
PROPERTY AND EQUIPMENT, net 8,767 6,442
NOTES RECEIVABLE 2,390 297
OTHER ASSETS, net 463 295
--------- ---------
$ 38,585 $ 39,591
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,691 $ 2,188
Accrued liabilities 486 453
--------- ---------
Total current liabilities 3,177 2,641
OTHER NONCURRENT LIABILITIES 88 94
MINORITY INTERESTS 3,025 1,024
DEFERRED REVENUE 11,000 11,000
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Total liabilities 17,290 14,759
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STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 5,000,000 shares authorized
no shares issued - -
Common stock, $0.01 par value, 150,000,000 shares authorized,
35,023,203 and 34,668,748 shares issued in 2000 and 1999
respectively, including shares in treasury 350 347
Additional paid-in capital 70,647 68,935
Notes receivable from sale of common stock (599) (699)
Accumulated deficit (49,026) (43,674)
--------- ---------
21,372 24,909
Less-treasury stock, 7,674,905 shares in
2000 and 1999, respectively (77) (77)
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Total stockholders' equity 21,295 24,832
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$ 38,585 $ 39,591
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
balance sheets.
1
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SYNTROLEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------
2000 1999
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REVENUES:
Joint development revenue $ 283 $ 603
Real estate sales 3,538 -
Other 54 163
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Total revenues 3,875 766
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COSTS AND EXPENSES:
Cost of real estate sales 3,078 -
Real estate operating expense 162 156
Pilot plant, engineering and research and development 3,153 1,652
General and administrative 3,035 2,154
------------ ------------
INCOME (LOSS) FROM OPERATIONS (5,553) (3,196)
INVESTMENT AND INTEREST INCOME AND
OTHER INCOME (EXPENSE) 235 387
------------ ------------
INCOME (LOSS) BEFORE MINORITY INTERESTS (5,318) (2,809)
MINORITY INTERESTS (34) 6
------------ ------------
NET INCOME (LOSS) $ (5,352) $ (2,803)
============ ============
NET INCOME (LOSS) PER SHARE-
Basic and diluted $ (0.20) $ (0.10)
============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 27,201,843 26,900,052
============ ============
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
statements.
2
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SYNTROLEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
COMMON STOCK NOTES
-------------- ADDITIONAL RECEIVABLE TOTAL
NUMBER PAID-IN FROM SALE OF ACCUMULATED TREASURY STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL COMMON STOCK DEFICIT STOCK EQUITY
-------- ------ ------- ------------ ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1999 34,669 $347 $68,935 $(699) $(43,674) $(77) $24,832
STOCK OPTIONS EXERCISED 360 3 1,844 - - - 1,847
NOTE REPAYMENT (6) - (132) 100 - - (32)
NET INCOME (LOSS) - - - - (5,352) - (5,352)
------- ---- -------- ------ --------- ----- --------
BALANCE, March 31, 2000 35,023 $350 $70,647 $(599) $(49,026) $(77) $21,295
======= ==== ======== ====== ========= ===== ========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
statements.
3
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SYNTROLEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(5,352) $(2,803)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operations:
Minority interest in income (loss) of subsidiary 34 (6)
Distribution of minority interest (33) -
Depreciation and amortization 242 118
Equity in earnings of affiliates (51) (20)
Changes in real estate held for sale and under development 2,828 (1,272)
Changes in assets and liabilities--
Accounts and notes receivable 1,020 (266)
Other assets (2,277) 59
Accounts payable 503 (254)
Accrued liabilities and other 27 (78)
-------- --------
Net cash provided by (used in) operating activities (3,059) (4,522)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,561) (253)
Purchase of short-term investments 124 (17)
-------- --------
Net cash provided by (used in) investing activities (2,437) (270)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Settlement of merger contingency - 5,997
Minority interest investment in subsidiary 2,000 -
Proceeds from exercise of stock options 1,847 -
-------- --------
Net cash provided by financing activities 3,847 5,997
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,649) 1,205
CASH AND CASH EQUIVALENTS, beginning of period 20,316 34,981
-------- --------
CASH AND CASH EQUIVALENTS, end of period $18,667 $36,186
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
statements.
4
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SYNTROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
1. BASIS OF REPORTING
The primary operations of Syntroleum Corporation (together with its
predecessors and subsidiaries, the "Company" or "Syntroleum") to date have
consisted of the research and development of a proprietary process (the
"Syntroleum Process") designed to convert natural gas into synthetic liquid
hydrocarbons. Synthetic liquid hydrocarbons produced by the Syntroleum Process
can be further processed into high quality liquid fuels such as diesel,
kerosene, gasoline, naphtha and fuel for fuel cells, or high quality specialty
products such as synthetic lubricants, process oils, high melting point waxes,
liquid normal paraffins, drilling fluids and chemical feedstocks.
The Company's current focus is to further demonstrate the commercial
viability of its proprietary technology. The Company has sold license
agreements to seven oil companies and is participating in the operation of a
pilot plant located at ARCO's refinery in Cherry Point, Washington. The Company
is developing a commercial-scale specialty products plant to be located in
Western Australia known as the Sweetwater plant.
The consolidated financial statements included in this report have been
prepared by Syntroleum without audit pursuant to the rules and regulation of the
Securities and Exchange Commission ("SEC"). Accordingly, these statements
reflect all adjustments (consisting of normal recurring entries) which are, in
the opinion of management, necessary for a fair statement of the financial
results for the interim periods presented. These financial statements should be
read together with the financial statements and the notes thereto included in
the Company's Annual Report on Form 10-K/A for the year ended December 31, 1999
filed with the SEC under the Securities Exchange Act of 1934, as amended, on
April 25, 2000.
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 financial statements
to conform with the 2000 presentation. These reclassifications did not impact
net income (loss).
3. EARNINGS PER SHARE
The Company applies the provisions of SFAS No. 128, "Earnings Per Share."
Basic and diluted earnings (losses) per common share were computed by dividing
net income (loss) by the weighted average number of shares of common stock
outstanding during the reporting periods. Options to purchase 2,395,496 shares
of common stock at an average exercise price of $7.79 were not included in the
computation of diluted earnings per share because inclusion of these options
would be anti-dilutive.
4. NOTES RECEIVABLE
In February 2000 the Company closed the sale of its Reno parking garage to
Fitzgeralds Reno, Inc. The sale price of $3 million was paid by $750,000 in
cash at closing and the balance in the form of Fitzgeralds' promissory note in
the principal amount of $2,250,000. The note bears interest at the rate of 10%
and is payable in monthly installments of principal and interest based on a 20
year amortization, with the entire unpaid balance due in 10 years. The note is
secured by the ground lease on which the garage is located as well as the
parking garage itself.
5. MINORITY INTERESTS
In January 2000, the Company received $2 million dollars from Methanex
Corporation towards the cost of the engineering work being performed by a third
party for the Sweetwater plant. These funds were received pursuant to a letter
of intent with Methanex that provided for the contribution by Methanex of an
additional $43 million in exchange for an equity interest in the Sweetwater
plant, subject to the execution of definitive agreements and the satisfaction of
certain conditions. At March 31, 2000, this contribution was recorded as a
minority interest. Subsequent to the end of the first quarter, Methanex
informed the Company that it was terminating further participation in the
Sweetwater plant. The $2 million contribution will be recorded as a reduction
in engineering costs for the Sweetwater plant in the second quarter of 2000.
The Company is in discussions with other potential equity partners.
5
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6. LICENSING ACTIVITY
Subsequent to March 31, 2000, the Company signed a volume license agreement
with Ivanhoe Energy Inc. Ivanhoe Energy is a Canadian oil and natural gas
exploration and development company, trading on the Toronto Stock Exchange.
Ivanhoe's principal current projects are in California, USA, and in China.
7. FOOTNOTES INCORPORATED BY REFERENCE
Certain footnotes are applicable to the financial statements, but
would be substantially unchanged from the footnotes presented in the audited
financial statements included in the Company's Annual Report on Form 10-K/A for
the year ended December 31, 1999 as filed with the SEC, and are incorporated
herein by reference as follows:
<TABLE>
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NOTE DESCRIPTION
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1. Summary of Significant Accounting Policies
2. Investments
3. Property and Equipment
4. Notes Receivable from Sale of Common Stock
5. Accrued Liabilities
6. Income Taxes
7. Supplemental Cash Flow Information
8. Commitments
9. Fair Value of Financial Instruments
10. Cash Equivalents and Short-Term Investments
11. Stock Options
12. Significant Customers
13. Stockholder Rights Plan
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
You should read the following information together with the information
presented elsewhere in this Quarterly Report on Form 10-Q and with the
information presented in our Annual Report on Form 10-K/A for the year ended
December 31, 1999 (including our audited financial statements and the
accompanying notes).
OUR BUSINESS
We are a leading developer, owner and licensor of a proprietary catalytic
process for converting natural gas to synthetic liquid hydrocarbons, generally
known as gas-to-liquids, or GTL, technology. We sell licenses to use our GTL
technology, the Syntroleum Process, for the production of fuels, and we plan to
develop and own GTL plants based on the Syntroleum Process that produce refined
specialty products and fuels. We believe that the costs to produce many products
from natural gas using the Syntroleum Process, including diesel fuel, gasoline
and lubricants, can be competitive with the costs to produce comparable quality
products from crude oil using conventional refining processes. The key
advantages of our technology over traditional GTL technologies are the use of
air in the conversion process (in contrast to the requirement for pure oxygen in
alternative technologies) and the use of our proprietary catalysts, which
enhance the conversion efficiency of the catalytic reaction. These advantages
reduce the capital and operating costs of GTL plants based on the Syntroleum
Process, while also permitting smaller unit sizes, including mobile plants that
could be placed on skids, barges and ocean-going vessels. Based on our
demonstrated research, we believe that the Syntroleum Process can be
economically applied in GTL plants with throughput levels from as low as 2,000
to over 100,000 barrels a day. As a result of the advantages of our technology
and the large worldwide resource base of stranded natural gas, we believe that a
significant market opportunity exists for the use of the Syntroleum Process by
our company and our licensees to develop cost-effective GTL plants.
6
<PAGE>
The Syntroleum Process produces synthetic liquid hydrocarbons, also known
as synthetic crude oil, which can be further processed into higher margin
products through conventional refining processes. These products include:
- Premium, ultra-clean liquid fuels, such as diesel, kerosene,
gasoline, naphtha and fuel for fuelcells, and
- Specialty products, such as synthetic lubricants, process oils, high
melting point waxes, liquid normal paraffins, drilling fluids and
chemical feedstocks.
We have successfully demonstrated many elements and variations of the
Syntroleum Process in pilot plant operations and laboratory tests, including our
joint participation in a 70 barrel per day GTL demonstration plant with one of
our licensees, ARCO. While we have not yet built a commercial-scale GTL plant
based on the Syntroleum Process, we are currently developing a 10,000 barrel per
day specialty product GTL plant based on the Syntroleum Process known as the
Sweetwater plant to be constructed in Western Australia. We are also evaluating
the potential development of additional GTL plants, including facilities that
will produce synthetic liquid fuels.
BUSINESS STRATEGY
Our objectives are to rapidly establish the Syntroleum Process as an
industry standard and maximize our market share relative to alternative GTL
technologies. Our business strategy to achieve these objectives involves the
following key elements:
- - continue broadly licensing our technology for the production of synthetic
crude oil and fuels,
- - use our technology to build and own plants designed to make specialty
products and fuels,
- - develop alternative markets for the synthetic products of GTL plants based
on the Syntroleum Process like ultra-clean fuels and fuels for fuel cell
applications, and
- - continue an aggressive research and development program alone and with
strategic partners to lower costs and expand the potential applications
for our technology.
OPERATING REVENUES
General. During the periods discussed below, our revenues were generated from
the following:
- - sales of real estate holdings owned by SLH Corporation prior to the merger
of Syntroleum Corporation and SLH Corporation,
- - reimbursement for research and development activities associated with
the Syntroleum Process, and
- - other sources, including rent generated by real estate holdings owned
by SLH prior to the merger.
Because our real estate portfolio has been substantially sold, we expect to
receive lower levels of revenues from these sources in following periods. In the
future, we expect to receive revenue relating to the Syntroleum Process from
four principal sources:
- - licensing,
7
<PAGE>
- - catalyst sales,
- - sales of products from GTL plants in which we own an equity interest,
and
- - revenues from research and development activities carried out with
industry partners.
Until the commencement of commercial operation of GTL plants in which we
own an interest, we expect that cash flow relating to the Syntroleum Process
will consist primarily of license fee deposits, site license fees and revenues
associated with joint development activities. We will not receive any cash flow
from GTL plants in which we own an equity interest until the first of these
plants is constructed. Our future operating revenues will depend on the
successful commercial construction and operation of GTL plants based on the
Syntroleum Process, the success of competing GTL technologies and other
competing uses for natural gas. Our results of operations and cash flows are
expected to be affected by changing crude oil, fuel and specialty product
prices. If the price of these products increases (decreases), there could be a
corresponding increase (decrease) in operating revenues.
License Revenues. The revenue earned from licensing the Syntroleum Process
Is expected to be generated through four types of contracts: master license
agreements, volume license agreements, regional license agreements and site
license agreements. Master, volume and regional license agreements provide the
licensee with the right to enter into site license agreements for individual GTL
plants. A master license agreement grants broad geographic and volume rights,
while volume license agreements limit the total production capacity of all GTL
plants constructed under the agreement to specified amounts, and regional
license agreements limit the geographical rights of the licensee. Master, volume
and regional license agreements require an up-front cash deposit that may offset
or partially offset license fees for future plants payable under site licenses.
We have acquired technology, commitment of funds for joint development
activities, services or other consideration in lieu of the initial cash deposit
in cases where we believed the technologies or commitments had a greater value.
Our site license agreements require fees to be paid in increments when
milestones during the plant design and construction process are achieved. The
amount of the license fee under our existing master and volume license
agreements is determined pursuant to a formula based on the present value of the
product of: (1) the yearly maximum design capacity of the plant, (2) an assumed
life of the plant and (3) our per barrel rate, which currently is approximately
$.50 per barrel of daily capacity, regardless of plant capacity. Our licensee
fees may change from time to time based on the size of the plant, improvements
that reduce plant capital cost and competitive market conditions. Our existing
master and volume license agreements allow for the adjustment of fees for new
site licenses under certain circumstances. Our accounting policy is to defer all
up-front deposits under master, volume and regional license agreements and
license fees under site license agreements and recognize 50% of the deposits and
fees as revenue in the period in which the engineering process design package
for a plant licensed under the agreement is delivered and recognize the other
50% of the deposits and fees when the plant has passed the performance tests.
The amount of license revenue we earn will be dependent on the construction of
plants by licensees, as well as the number of licenses we sell in the future.
Catalyst Revenues. We expect to earn revenue from the sale of our
Proprietary catalysts to our licensees. Our license agreements require our
catalyst to beused in the initial fill for the licensee to receive our process
guarantee.After the initial fill, the licensee may use other catalyst vendors
if appropriate catalysts are available. The price for catalysts purchased from
us pursuant to license agreements is equal to our cost plus a specified margin.
We will receive revenue from catalyst sales if and when our licensees purchase
catalysts. We expect that catalysts will need to be replaced every three to five
years.
GTL Plant Revenues. We intend to develop several GTL plants and to retain
significant equity interests in these plants. These plants will enable us to
gain experience with the commercial operation of the Syntroleum Process and, if
successful, are expected to provide ongoing revenues. The anticipated products
of these plants (i.e., fuels, synthetic lube base oils, process oils, waxes,
synthetic drilling fluid and liquid normal paraffins) have historically been
sold at premium prices and are expected to result in relatively high margins for
these plants. We anticipate forming several joint ventures with energy industry
and financial partners in order to finance and operate these plants. We
anticipate that our GTL plants will include partners who have low-cost gas
reserves in strategic locations and/or have distribution networks in place for
the specialty products to be made in each plant.
8
<PAGE>
Joint Development Revenues. We continually conduct research and development
activities in order to reduce the capital and operating costs of GTL plants
based on the Syntroleum Process. We conduct our research and development
activities primarily through two initiatives: (1) independent development
utilizing our own resources and (2) formal joint development arrangements with
our licensee partners and others. Through these joint development agreements, we
may receive revenue as reimbursement for specified portions of our research and
development expenses. Under some of these agreements, the joint development
partner may receive credits against future license fees for monies expended on
joint research and development.
Real Estate Sales Revenues. As of March 31, 2000, our real estate
inventory consisted of undeveloped land in Houston, Texas (300 acres of
undeveloped land and 100 lots comprising the "Houston Project"), and in Corinth,
Texas (nine acres). This real estate inventory was owned by SLH Corporation
prior to the merger of Syntroleum Corporation and SLH Corporation and reflects
the remaining assets of a real estate development business that was conducted
by SLH's former parent corporation. Our total real estate inventory had an
aggregate carrying value at March 31, 2000 of approximately $3.2 million. All
of our real estate inventory is held for sale except the Houston Project, which
is being developed for commercial and residential use and ultimate sale. The
timing of real estate sales will create variances in period-to-period earnings
recognition. We do not intend to acquire additional real estate holdings for
development and/or sale outside our core business interests, and real estate
sales revenues should decrease as the current real estate inventory is
liquidated.
In February 2000 we closed the sale of our Reno parking garage to
Fitzgeralds Reno, Inc. The sale price of $3 million was paid by $750,000 in
cash at closing and the balance in the form of Fitzgeralds' promissory note in
the principal amount of $2,250,000. The note bears interest at the rate of 10%
and is payable in monthly installments of principal and interest based on a 20
year amortization, with the entire unpaid balance due in 10 years. The note is
secured by the ground lease on which the garage is located as well as the
parking garage itself.
Operating Expenses
Our operating expenses historically have consisted primarily of pilot
plant, engineering and research and development expenses and general and
administrative expenses, which include costs associated with general corporate
overhead, compensation expense, legal and accounting expense and expenses
associated with other related administrative functions. Our policy is to expense
pilot plant, engineering and research and development costs as incurred. All of
these research and development expenses are associated with our development of
the Syntroleum Process. We have also recognized depreciation and amortization
expense primarily related to office and computer equipment. Our operating
expenses have also included costs of real estate sold and real estate operating
expense. Our general and administrative expenses have increased substantially,
and we have expanded our research and development, engineering and commercial
staffing levels. These expenses are expected to continue to increase. We also
expect to continue to incur pilot plant, engineering and research and
development expenses as we continue to develop and improve our GTL technology.
We expect to incur significant expenses in connection with the start-up of
our GTL plants. For example, we expect that our expenses will increase at the
time of commencement of construction of GTL plants in which we own an interest.
Upon the commencement of commercial operation of GTL plants in which we own an
equity interest, we will incur cost of sales expenses relating primarily to the
cost of natural gas feedstocks for our specialty plants and operating expenses
relating to these plants, including labor, supplies and maintenance. Due to the
substantial capital expenditures associated with the construction of GTL plants,
we expect to incur significant depreciation and amortization expense in the
future. Our policy is to capitalize costs associated with the development of
GTL plants.
RESULTS OF OPERATIONS
OVERVIEW
During the first three months of 2000, we continued our efforts to
commercialize our GTL technology on several fronts. We continued our joint
participation with ARCO in a 70 barrel per day demonstration GTL plant located
at ARCO's Cherry Point refinery in the State of Washington. The plant began
operating in July 1999 and has been successfully operating since that time.
Plant operations have exceeded our expectations and have successfully
demonstrated a number of key aspects of our proprietary autothermal reformer and
moving bed reactor designs and related catalyst performance. We continue to
gather data and experience from plant operations which will be useful in our
efforts to apply these reactor designs on a commercial basis both for fuels and
specialty product plants. Pilot tests at the Cherry Point facility are
scheduled to be completed by June 2000.
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We continued our activities to confirm catalyst performance and reactor
designs for our proposed Sweetwater project. These activities included the
construction and operation of new pilot scale Fischer-Tropsch reactors at our
pilot plant in Tulsa, Oklahoma. Operation of these reactors will allow us to
complete a battery of confirmation tests and continue detailed engineering of
our proposed Sweetwater plant during the year 2000.
We also continued our efforts to advance numerous other aspects of the
Sweetwater project. In February 2000, we selected a site for the plant
approximately 4 kilometers from the North West Shelf liquid natural gas facility
on the Burrup Peninsula of Western Australia. We entered into a letter of intent
with the Commonwealth of Australia in February 2000 to license the Syntroleum
Process as part of a program designed to unlock the value of Australia's energy
reserves and improve the quality of the environment. Under this letter of
intent, the Commonwealth would make an AUD$30 million (approximately U.S.$19
million) deposit, of which AUD$20 million (approximately U.S.$12.4 million) may
be credited against future license fees. The letter of intent also provides that
the Commonwealth would make an unsecured, interest-free loan in the amount of
AUD$40 million (approximately U.S.$25 million) with a 25-year maturity to
support the further development and commercialization of GTL technologies in
Australia, and that we would conduct a feasibility study on constructing a
large-scale GTL fuels plant in Australia. The transactions contemplated by our
letter of intent with the Commonwealth are subject to the execution of
definitive license and loan agreements.
Subsequent to the end of the first quarter of 2000, we entered into a
non-exclusive volume license agreement with Ivanhoe Energy Inc. granting Ivanhoe
rights to use the Syntroleum Process to convert natural gas into synthetic oil
and transportation fuels.
Because we are incurring costs with respect to developing and
commercializing the Syntroleum Process and do not anticipate recognizing any
significant revenues from licensing our technology or from production from a
specialty plant in the near future, we expect to continue to operate at a loss
unless and until sufficient revenues are recognized from licensing activities,
GTL plants or real estate sales.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31,
1999
Joint Development Revenue. Revenues from our joint research and
development and pilot plant operations were $283,000 in the first three months
of 2000, down $320,000 from the first three months of 1999 when they were
$603,000. The decrease was primarily due to the completion during 1999 of the
funding received under our joint development agreement with ARCO relating to the
construction of the pilot plant at ARCO's Cherry Point refinery in Washington.
We continue to receive funding for the operating of this pilot plant.
Real Estate Sales Revenue. Revenues from the sale of real estate were
$3,538,000 in the first three months of 2000, compared to zero in the first
three months of 1999. The increase was due to the sale of our Reno parking
garage to Fitzgeralds Reno, Inc. during February of this year and the sale of
25 lots from our Houston Project. There were no real estate sales during the
first quarter of 1999. Real estate sales revenues should decrease as the
remaining real estate inventory is sold.
Other Revenue. Other revenues were $54,000 in the first three months of
2000, down $109,000 from the first three months of 1999 when they were $163,000.
The decrease resulted primarily from the lower parking and retail rentals from
our parking garage in Reno, Nevada, which we sold in February of this year.
Cost of Real Estate Sold and Real Estate Operating Expense. The cost of
real estate sold was $3,078,000 in the first three months of 2000, compared to
zero in the first three months of 1999. The increase resulted from the sale of
our Reno parking garage to Fitzgeralds Reno, Inc. during February of this year
and the sale of 25 lots from our Houston Project. We had no real estate sales
in the first quarter of 1999. Real estate expenses were $162,000 during the
first quarter of 2000, up $6,000 from $156,000 in the first quarter of 1999.
This increase was due to intensified efforts to sell the remaining real estate
assets acquired in the merger with SLH during 1998.
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Pilot Plant, Engineering and R&D. Expenses from pilot plant, engineering
and research and development activities were $3,153,000 in the first three
months of 2000, up $1,501,000 from the first three months of 1999 when these
expenses were $1,652,000. The increase occurred primarily as a result of the
continued expansion of our Tulsa, Oklahoma pilot plant facility, higher
research and development spending and higher outside engineering expense
associated with the design and engineering of the Sweetwater plant.
General and Administrative Expense. General and administrative expenses
were $3,035,000 in the first three months of 2000, up $881,000 from the first
three months of 1999 when these expenses were $2,154,000. The increase is
attributable primarily to higher wages and salaries resulting from our higher
staffing levels, higher rent expense and higher expense for outside consultants.
Investment, Interest and Other Income (Expense). Investment, interest and
other income decreased to $201,000 in the first three months of 2000, down
$192,000 from the first three months of 1999 when this income was $393,000.
The decrease was primarily attributable to increased minority interest expense
from the Houston project and lower cash balances invested during the first
quarter of 2000 compared to the 1999 period.
Provision for Income Taxes. We incurred a loss in both the first three
months of 2000 and the first three months of 1999 and did not recognize an
income tax benefit for such loss.
Net Income. In the first three months of 2000, we experienced a loss of
$5,352,000. The loss was $2,549,000 higher than in the first three months of
1999 when we experienced a loss of $2,803,000. The increase in the loss is a
result of the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
General
As of March 31, 2000, we had $22,108,000 in cash and short-term
investments and $3,177,000 in current liabilities. We do not currently have any
material outstanding debt or lines of credit. Prior to our merger with SLH, our
primary sources of liquidity were equity capital contributions and prepaid
license fees and our principal liquidity needs were to fund expenditures
relating to research and development and pilot plant activities and to fund
working capital. At March 31, 2000, we had $173,000 in accounts and notes
receivable outstanding with our joint development partners relating to joint
development activities. We currently have short-term investments approximating
$3.2 million which secure 49.9 percent of a letter of credit for the Powder
Basin Partnership in which we are a 49.9 percent investor.
Cash flows used in operations were $3,027,000 in the first three months of
2000 compared to $4,522,000 during the first three months of 1999. The decrease
in cash flows used in operations during the first three months of 2000 compared
to the first three months of 1999 was primarily the result of the completion of
construction of the Cherry Point pilot plant in Cherry Point, Washington during
1999 which was constructed under a joint development agreement between ourselves
and ARCO. Cash flows used in operations also decreased because of the
completion of site development for the beginning phases of the Houston Project
, the sale of the Reno garage and the sale of 25 lots in the Houston Project.
Cash flows used in investment activities were $2,437,000 in the first three
months of 2000 compared to $270,000 in the first three months of 1999. The
increase in cash flows used in investing activities in the first three months of
2000 compared to the first three months of 1999 resulted primarily from the
increased capitalized development costs for the Sweetwater project to be located
in Western Australia.
Cash flows provided by financing activities were $3,815,000 in the first
three months of 2000 compared to $5,997,000 in the first three months of 1999.
The decrease was primarily due to the receipt during 1999 of approximately $6.0
million in satisfaction of a judgment in our favor which was a contingency of
the merger with SLH. This was offset by a $2,000,000 payment by Methanex used
to fund costs associated with the Sweetwater project and the exercise of
employee stock options during the first quarter of 2000.
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The construction of our GTL plants will require significant capital
expenditures. Our other efforts to commercialize the Syntroleum Process will
also involve significant expenditures. We have an effective $120 million shelf
registration statement for the proposed offering from time to time of shares of
our common stock. We intend to obtain additional funding through joint ventures,
partnerships, license agreements and other strategic alliances, as well as
various other financing arrangements. We may also seek debt or additional equity
financing in the capital markets. In the event such capital resources are not
available to us, our GTL plant development and other activities may be
curtailed. Additionally, we estimate that construction and disposal costs to
complete real estate projects in development will be approximately $1.5 million.
We have sought to temporarily invest our assets, pending their use, so
as to avoid becoming subject to the registration requirements of the Investment
Company Act of 1940. These investments are likely to result in lower yields on
the funds invested than might be available in the securities market generally.
If we were required to register as an investment company under the Investment
Company Act, we would become subject to substantial regulation that would
materially adversely affect us.
If five or fewer individuals own, directly or under constructive
ownership rules, more than 50% in value of our outstanding stock at any time
during the last half of a taxable year and at least 60% of our adjusted
ordinary gross income consists of personal holding company income, we would be
subject to not only the regular federal income tax, but would also be subject
to an additional tax of 39.6% of our undistributed personal holding company
income. Based on current levels of stock ownership, we believe that slightly
less than 50% in value of our common stock is owned by five or fewer
individuals. We also believe that payments we receive under our license
agreements do not constitute items of personal holding company income,
although the Internal Revenue Service may contest that position.
Initial Specialty Product GTL Plant
We are developing a 10,000 barrel per day specialty product plant, which
we call the Sweetwater plant. We currently anticipate that this plant will
produce synthetic lube oil, normal paraffins, process oils and light paraffins.
The plant is expected to use a fixed tube reactor design because this design
produces a high yield of the desired products with high wax content and has
lower scale-up risks than other reactor designs. The plant is also expected to
include additional refining equipment necessary to produce the targeted
specialty products. We plan to construct this plant through a joint venture.
Enron has contributed $1 million toward the development of the project, and we
are currently in discussions with a Enron regarding its equity participation
in this joint venture. In February 2000, we selected a site for the plant about
four kilometers from the North West Shelf liquid natural gas facility on the
Burrup Peninsula of Western Australia.
The State of Western Australia recently announced its intention to assist
the Sweetwater project with an AUD$30 million (approximately U.S.$19 million)
common use infrastructure package, including a desalinization plant to which our
project will supply steam and from which our project will receive cooling water.
In addition, we have entered into a gas purchase agreement with the North West
Shelf Gas Partners, whose members include affiliates of BHP Petroleum, BP Amoco,
Chevron, Mitsui, Mitsubishi, Royal Dutch Shell and Woodside Energy Ltd. Subject
to certain conditions, North West Shelf Gas Partners agreed to supply the
Sweetwater plant with the natural gas required to operate the plant at full
capacity for 20 years.
In November 1999, we signed a project development agreement with Tessag, a
wholly-owned subsidiary of RWE AG, to provide us with a fixed price for the
design and construction of the Sweetwater plant. Tessag also agreed to pay
liquidated damages up to certain levels in the event certain process and product
specifications are not achieved. We currently expect that Tessag will complete
the plant design and commence construction in early 2001. We expect the plant to
be operational in 2003, although construction of the plant will be subject to
the risk of delay inherent in any large construction project.
We entered into a letter of intent with the Commonwealth of Australia in
February 2000 to license the Syntroleum Process as part of a program designed to
unlock the value of Australia's energy reserves and improve the quality of the
environment. Under this letter of intent, the Commonwealth would make an AUD$30
million (approximately U.S.$19 million) deposit, of which AUD$20 million
(approximately U.S.$ 12million) may be credited against future license fees. The
letter of intent also provides that the Commonwealth would make a
non-amortizing, interest-free loan in the amount of AUD$40 million
(approximately U.S.$25 million) with a 25-year maturity to support the further
development and commercialization of GTL technologies in Australia, and that we
would conduct a feasibility study on constructing a large-scale GTL fuels plant
in Australia. The transactions contemplated by our letter of intent with the
Commonwealth are subject to the execution of definitive license and loan
agreements.
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In January 2000, we received $2 million dollars from Methanex Corporation
towards the cost of engineering work being performed by Tessag pursuant to a
letter of intent that provided for the contribution by Methanex of an additional
$43 million in exchange for an equity interest in the plant, subject to the
execution of definitive agreements and the satisfaction of certain conditions.
In May 2000, Methanex informed us that it was terminating its participation in
the Sweetwater project.
The capital costs of this plant are currently expected to be funded
primarily by non-recourse senior and subordinated debt at the project level, as
well as equity financing. We are currently exploring sources of debt and equity
capital to fund final design and construction. However, we can give no
assurance that the necessary capital for this project will be obtained.
CURRENCY RISK
We expect to conduct a portion of our business in currencies other than the
United States dollar. We may attempt to minimize our currency exchange risk by
offsetting these currency positions with contracts payable in local currency or
we may choose to convert our currency position. For example, our proposed
funding plan with the Commonwealth of Australia will be in Australian dollars.
In addition, we expect to seek contractual purchase price adjustments based on
an exchange rate formula related to United States dollars. In the future, we may
also have significant investments in countries other than the United States. The
functional currency of these foreign operations may be the local currency, and
accordingly, financial statement assets and liabilities may be translated at
prevailing exchange rates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
''Accounting for Derivative Instruments and Hedging Activities.'' SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement. Companies must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS No.
133, as amended by SFAS No. 137, is effective for fiscal years beginning after
June 15, 2000. However, companies may elect to adopt SFAS No. 133 prior to that
date. SFAS No. 133 cannot be applied retroactively and must be applied to (a)
derivative instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired, or substantively modified after December
31, 1997. We are currently in the process of determining timing and the effect
of adopting SFAS No. 133.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We had short-term investments in the form of U.S. Treasury securities as of
March 31, 2000. The majority of these securities mature in less than 90 days.
Our policy is to hold short-term securities to maturity which minimizes interest
rate risk. The average interest rate on these investments at March 31, 2000 was
approximately 6%.
We do not currently conduct any material operations in foreign markets.
Accordingly, we do not have material market risk related to foreign exchange
rates.
We do not purchase futures contracts nor do we purchase or hold any
derivative financial instruments.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Reports on Form 8-K. Not applicable.
Exhibits. The following exhibits are filed as part of this quarterly
report:
10.1 License Agreement dated April 26, 2000 between Syntroleum
Corporation and Ivanhoe Energy Inc.
27 Financial Data Schedule.
____________________
* Incorporated by reference as indicated.
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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.
SYNTROLEUM CORPORATION, a Delaware
corporation (Registrant)
Date: May 12, 2000 By: /s/ Mark A. Agee
----------------
Mark A. Agee
President and Chief Operating Officer
Date: May 12, 2000 By: /s/ Randall M. Thompson
-----------------------
Randall M. Thompson
Chief Financial Officer
(Principal Financial Officer)
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INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
10.1 License Agreement dated April 26, 2000 between Syntroleum
Corporation and Ivanhoe Energy Inc.
27 Financial Data Schedule.
____________________
* Incorporated by reference as indicated.
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CONFIDENTIAL
Volume License Agreement
Between
Syntroleum Corporation
and
Ivanhoe Energy Inc.
CONFIDENTIAL INFORMATION:
Use and distribution of this document is limited to the terms and conditions of
the confidentiality agreement dated February 7, 2000 between Syntroleum
Corporation and Ivanhoe Energy Inc.
<PAGE>
THIS LICENSE AGREEMENT is made and entered into as of this ___ day of
April, 2000 by and between Syntroleum Corporation, a Delaware corporation
("Licensor"), and Ivanhoe Energy Inc. , a company duly incorporated in Canada
("Licensee").
RECITALS
--------
A. WHEREAS, Licensor has developed and owns certain patent rights and
technical information relating to the Conversion Process; and
B. WHEREAS, Licensee desires to enter into a non-exclusive limited
license with Licensor to use Licensor Patent Rights and Licensor Technical
Information in practicing the Conversion Process in Licensed Facilities in the
Licensed Territory.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, the Parties agree as follows:
1. DEFINITIONS
---------------
The following terms (whether or not underscored) when used in this
Agreement, including its preamble and recitals, shall, except where the context
otherwise requires, have the following meanings (such meanings to be equally
applicable to the singular and plural forms thereof).
1.01 "AFFILIATE" means, with respect to each Party, any Person in which the
Party or its parent company(ies) (one or more parent companies in an upward
series) shall at the time in question directly or indirectly own a fifty percent
(50%) or more interest in such Person. It is understood that: (i) a Party or
its parent company(ies) directly owns a fifty percent (50%) or more interest in
a Person if that Party or its parent company(ies) individually or collectively
hold(s) shares carrying fifty percent (50%) or more of the voting power to elect
directors or other managers of such Person and (ii) a Party or its parent
company(ies) indirectly owns a fifty percent (50%) or more interest in a Person
if a series of companies can be specified beginning with a Party or its parent
company(ies), individually or collectively, and ending with such Person so
related that each company of the series, except such Person, directly owns a
fifty percent (50%) or more interest in a later company in the series.
1.02 "AGREEMENT" means this Volume License Agreement.
1.03 "BARREL" means forty-two (42) gallons of two hundred thirty-one (231)
cubic inches each, measured at sixty degrees Fahrenheit (60 F) and one (1)
atmosphere pressure.
1.04 "CHAIN-LIMITING CATALYST" means a type of catalyst for use in a
Fischer-Tropsch Reaction the primary products of which are predominately
hydrocarbon molecules of twenty (20) or fewer carbon atoms which remain liquid
at ambient temperature and pressure.
1.05 "CONFIDENTIAL INFORMATION" means information of Licensor or Licensee
disclosed to the other Party under this Agreement, including any formula,
pattern, compilation, program, apparatus, device, drawing, schematic, method,
technique, know-how, process or pilot plant data, -and other non-public
information such as business plans or other technology that: (a) derives
economic value, actual or potential, from not being generally known to, and not
being readily ascertainable by proper means by, other persons who can obtain
economic value from its disclosure or use, and (b) is the subject of efforts
that are reasonable under the circumstances to maintain its secrecy, which
information shall be disclosed in writing and labeled as "Confidential" or the
equivalent, or if disclosed verbally or in other non-written form, identified as
such at the time of disclosure and thereafter summarized in writing by the
disclosing Party within thirty (30) days of such initial disclosure.
Confidential Information includes, without limit, Licensor Catalyst Information,
Licensor Technical Information, and Licensee Technical Information.
1.06 "CONFIDENTIALITY AGREEMENT" means the agreement between Licensee and
Licensor dated February 7, 2000.
1.07 "CONVERSION PROCESS" means any process for the conversion of normally
gaseous hydrocarbons into a mixture of hydrocarbons which may be a combination
of normally gaseous, liquid, or solid hydrocarbons at ambient temperatures and
pressures and comprised of (a) autothermal reforming of a feed stream consisting
substantially of gaseous hydrocarbons in the presence of air, or oxygen-enriched
air to create an intermediate feed stream containing carbon monoxide and
molecular hydrogen, and (b) reacting the intermediate stream in the presence of
a Fischer-Tropsch catalyst to produce a product stream consisting of any
combination of gaseous, liquid or solid hydrocarbons at ambient temperature and
pressure. The Conversion Process includes all associated internal processes and
technologies such as heat integration, separation, or the recycle, use, or
consumption of hydrocarbons or other products. The Conversion Process does not
include any technology related to (i) pre-treatment of the natural gas feedstock
or (ii) post-processing the Fischer-Tropsch product stream for a purpose other
than that defined above.
1.08 "EFFECTIVE DATE" means the date set forth in the first paragraph of
this Agreement.
1.09 "FISCHER-TROPSCH CATALYST" means any catalyst for use in a
Fischer-Tropsch Reaction including, but not limited to, Chain Limiting Catalyst
and High Alpha Catalyst.
1.10 "FISCHER-TROPSCH REACTION" means the catalytic reaction of carbon
monoxide and hydrogen, the primary products of which are hydrocarbons.
1.11 "HIGH ALPHA CATALYST" means a type of Fischer-Tropsch Catalyst,
whose alpha number, as calculated by the Schulz-Flory distribution equation, is
0.85 or higher.
"INVENTIONS OR IMPROVEMENTS" means any process, formula, composition, device,
catalyst (including both autothermal reforming catalysts and Fischer-Tropsch
Catalysts), apparatus, technology, know-how, operating technique, improvement,
modification, or enhancement relating to the use, operation, or
commercialization of the Conversion Process and the products (including
Synthetic Product) of the Conversion Process, which is discovered, made,
designed, developed or acquired by Licensee, solely or with others, since the
date of the Confidentiality Agreement, or used in a Licensed Plant, in each
instance whether patentable or not, including, without limitation, patents,
copyrights, and Confidential Information and further including the full scope
and content of the intellectual and tangible property included therein and
produced therefrom, e.g., drawings, prints, chemical formulae, prototypes, data,
computer programs and software, and the like. Inventions or Improvements shall
not include any information relating to methods of manufacturing catalysts for
use in the Conversion Process.
1.12 "LICENSE FEE" means the fee paid by Licensee to Licensor, as
consideration for granting a license pursuant to a Site License Agreement to use
Licensor Technology at a Licensed Plant, as calculated in accordance with
Attachment 3 of this Agreement, and does not include fees related to the
purchase of the associated Process Design Package for such Licensed Plant, any
catalyst or any catalyst markup.
1.13 "LICENSED FACILITIES" means one or more Licensed Plants.
1.14 "LICENSED PLANT" means a plant (including modification, expansion
or replacement thereof) licensed to operate pursuant to a Site License Agreement
issued under the terms of this Agreement, at a site within the Licensed
Territory with a design production capacity measured in Barrels of Synthetic
Product per day, using or designed to use Licensor Technology to practice the
Conversion Process to produce Marketable Products.
1.15 "LICENSED TERRITORY" means all the countries of the world and
their respective territorial waters, e-xcept for the United States of America,
Canada, Mexico, the People's Republic of China, India, and their respective
territorial waters and any country and its territorial waters (i) that, from
time to time, may be prohibited, or whose citizens (considered as a group) may
be prohibited, by the United States government from receiving Licensor
Technology or the products thereof or (ii) the inclusion of which in the
definition of Licensed Territory is, or could in good faith be argued to be,
prohibited by United States law, including, without limitation, United States
Executive Orders and administrative orders, rules and regulations. Licensed
Territory shall include territories or territorial waters which are the subject
of official dispute between or among countries only if all countries claiming
sovereignty, a sovereign right, or jurisdiction over such territories or
territorial waters are otherwise included within the definition of such term.
1.16 "LICENSEE PATENT RIGHTS" means all rights with respect to patents
and patent applications of all relevant countries to the extent that the claims
cover features or aspects of Inventions or Improvements practiced in a Licensed
Plant, in each case to the extent that, and subject to the terms and conditions
under which, Licensee has the right to grant licenses, immunities or licensing
rights without having to make payment to others.
1.17 "LICENSEE TECHNICAL INFORMATION" means all unpatented Inventions
or Improvements practiced in a Licensed Plant, in each case to the extent that,
and subject to the terms and conditions under which, Licensee has the right to
grant licenses, immunities or licensing rights without having to make payment to
others.
1.18 "LICENSOR CATALYST INFORMATION" means, without limit, information
relating to any catalyst, catalyst formulation, conditioning procedure, start-up
procedure, regeneration procedure, or performance considered to be proprietary
by and to Licensor or acquired by Licensor which is useful in the practice of
the Conversion Process and which has been used commercially or is ready for
commercial use. Licensor Catalyst Information shall not include any information
relating to methods for manufacturing catalysts for use in the Conversion
Process.
1.19 "LICENSOR CATALYST PATENT RIGHTS" means all rights with respect to
patents and patent applications of all relevant countries to the extent that the
claims cover features or aspects of catalysts useable in the Conversion Process
(including, without limitation, autothermal reforming catalysts and
Fischer-Tropsch Catalysts) and expressly excluding any process operating
techniques or apparatus or methods for manufacturing such catalysts, which are
acquired by Licensor (with right to sublicense) or are based on inventions
conceived by Licensor prior to termination of this Agreement; in each case to
the extent that, and subject to the terms and conditions, including the
obligation to account to and/or make payments to others, under which Licensor
has the right to grant licenses, sublicenses, immunities or licensing rights.
1.20 "LICENSOR PATENT RIGHTS" means all rights with respect to patents
and patent applications of all relevant countries to the extent that the claims
cover features or aspects of the Conversion Process (including, without
limitation, any operating techniques and apparatus and expressly excluding
Licensor Catalyst Patent Rights) which are acquired by Licensor (with right to
sublicense) or are based on inventions conceived by Licensor prior to
termination of this Agreement; in each case to the extent that, and subject to
the terms and conditions, including the obligation to account to and/or make
payments to others, under which Licensor has the right to grant licenses,
sublicenses, immunities or licensing rights.
1.21 "LICENSOR TECHNICAL INFORMATION" means all unpatented information
relating to the Conversion Process (including, without limitation, operating
techniques and apparatus for carrying out the Conversion Process and expressly
excluding Licensor Catalyst Information and Reactor Information) which (a)
either (i) has been commercially used or (ii) is in a stage of development
suitable for commercial use, and (b) has been made or acquired by Licensor (with
right to sublicense) prior to the termination of this Agreement; in each case to
the extent that, and subject to, the terms and conditions, including the
obligation to account to and/or make payments to others, under which Licensor
has the right to disclose and grant rights to others.
1.22 "LICENSOR TECHNOLOGY" includes Licensor Technical Information and
Licensor Patent Rights related to the practice of the Conversion Process and
Licensor Catalyst Information and Licensor Catalyst Patent Rights related to the
use of Licensor catalysts in the practice of the Conversion Process but
expressly excluding the right to make, have made, or sell Licensor Catalysts.
1.23 "LUBRICANTS" means hydrocarbon base oils which can be made into,
or blended with other base oils to be made into, without limit (a) automotive
lubricating oils such as PCMO, HDD, transmission and hydraulic fluids, and gear
oils; (b) industrial lubricants such as metalworking lubricants, process oils,
white oils, agricultural spray oils, de-foamers, cutting and quenching oils, and
rubber processing oils; (c) greases; (d) drilling fluids; or (e) any other
specialty product agreed to by the Parties which is not a Marketable Product.
1.24 "MARKETABLE PRODUCTS" means finished hydrocarbon fuels,
hydrocarbons consumed as fuel, or fuel blending stocks including, but not
limited to, diesel, kerosene, gasoline, and naphtha processed from Synthetic
Product and expressly excluding waxes, chemicals, Lubricants, or any other
specialty hydrocarbon products and subject to the express condition that
Marketable Products shall be produced from Synthetic Product at the Licensed
Plant or produced from Synthetic Product at a separate facility operated by the
Licensee, its Affiliates, or third Persons who are contractually committed to
Licensee or its Affiliate to produce only Marketable Products from such
Synthetic Product. Notwithstanding the foregoing, Marketable Products shall be
deemed to include any products:
(a) produced at any location by any Person from a blended stream of
Synthetic Product and at least 15 % by volume of produced crude oil or
condensate, in which the Synthetic Product, before any blending,
(i) remains a liquid at sixty degrees Fahrenheit (60 F) and one (1) atmosphere
pressure or,
(ii) has a chemical composition consisting of molecules having at least 85 % by
volume of which contain no more than 20 carbon atoms each and no more than 1 %
by volume of which contains more than 40 carbon atoms each; or
(b) produced at any location by any Person from a blended stream of
Synthetic Product and at least 40 % by volume produced crude oil or condensate
such that after blending the mixture is a transportable liquid, expressly
excluding slurries; or
(c) produced by blending individual fractions distilled from Synthetic
Product with at least 50 % by volume of like distilled fractions from produced
crude oil or condensate, in which each distilled fraction from Synthetic
Product, before any blending, has a chemical composition consisting of molecules
having at least 85 % by volume of which contain no more than 20 carbon atoms
each and no more than 1 % by volume of which contains more than 40 carbon atoms
each, wherein the blending is performed at any location by the Licensee, its
Affiliates, or third Persons who are contractually committed to Licensee or its
Affiliate to produce only Marketable Products from such Synthetic Product.
1.25 Notwithstanding the above language in this Section 1.25 hydrocarbons
consumed as fuel by Licensee or its Affiliates at locations which satisfy the
conditions of this Section 1.25 are Marketable Products, regardless of whether
or not they happen to be waxes, chemicals, Lubricants, or any other specialty
hydrocarbon products.
1.26 "PARTICIPATING INTEREST" means a Person's working, net profits,
equity, or other economic interest (an economic interest shall include an
interest in a production sharing contract where the parties to such contract
construct the Licensed Plant), owned directly or indirectly through another
entity, in a Licensed Plant or Person owning or controlling a Licensed Plant,
but excluding a contract for operation of such Licensed Plant, which interest,
in the case of Licensee, shall at all times be no less than ten percent (10%).
1.27 "PARTIES" means Licensor and Licensee.
1.28 "PARTY" means Licensor or Licensee.
1.29 "PERSON" means any natural person, corporation, partnership,
limited liability company, firm, association, trust, government, governmental
agency or any other entity, other than the Parties.
1.30 "PROCESS DESIGN PACKAGE" means a compilation of text, figures,
drawings and documentation, relating to the design and construction of a
Licensed Plant, in the form set forth in Exhibit B to the Site License
Agreement, which may be modified from time to time by mutual consent of the
Parties, and expressly excluding Reactor Information.
1.31 "REACTOR INFORMATION" means all information, including but not limited
to data, processes, plans, specifications, flow sheets, designs, and drawings,
relating to the internal design or functions including, without limitation, tube
count, tube size and configuration and catalyst volume, relating to any Licensor
autothermal reformer or Fischer-Tropsch reactors, which, at any time during the
term of this Agreement, Licensor discloses to Licensee.
1.32 "REACTOR VENDOR" shall mean those fabricators approved by Licensor
to perform the fabrication and/or maintenance and repair of autothermal reformer
or Fischer-Tropsch reactors for installation and use in Licensed Facilities.
Licensor may, from time to time, add or remove any vendor from being a Reactor
Vendor.
1.33 "SITE LICENSE AGREEMENT" means an agreement between the Parties,
in the form attached to this Agreement as Attachment 4 and which may be modified
from time to time by mutual written consent of the Parties, granting the right
to build and operate a single Licensed Plant, specifying in each case the fixed
site and the nominal design capacity, in Barrels of Synthetic Product produced
per day.
1.34 "START-UP DATE" means the first full calendar day following a five
day period, after completion of catalyst pre-treatment and other preliminary
operations, during which the applicable Licensed Plant produces quantities of
Synthetic Product in an amount equal to at least 75% of the per-day design
production capacity of such Licensed Plant averaged over such five day period.
1.35 "SYNTHETIC PRODUCT" means those hydrocarbons, having a chemical
composition substantially consisting of molecules with five or more carbon atoms
each, produced using Licensor Technology in the practice of the Conversion
Process at a Licensed Plant.
2. LICENSOR GRANTS TO LICENSEE
-------------------------------
2.01 Subject to the terms and conditions of this Agreement, Licensor grants
to Licensee a limited, non-exclusive, non-transferable (except as provided in
Section 2.06 and Article 8) right and license to use Licensor Patent Rights and
Licensor Technical Information to design, construct, operate and maintain
(including modify, expand and replace) Licensed Facilities under a separate Site
License Agreement for each Licensed Plant, to practice the Conversion Process to
manufacture Synthetic Product solely for the purpose of producing, using, and
selling Marketable Products anywhere in the world, provided that the aggregate
maximum daily design capacity of the Licensed Facilities, as defined in the
Process Design Packages for all Licensed Plants which comprise the Licensed
Facilities, shall not exceed 50,000 barrels per day of Synthetic Product,
regardless of Licensee's specific Participating Interest in any particular
Licensed Plant.
2.02 Subject to the terms and conditions of this Agreement, Licensor grants
to Licensee a limited, non-exclusive, non-transferable (except as provided in
Section 2.06 and Article 8) right to purchase from Reactor Vendors the
appropriate Fischer-Tropsch and autothermal reforming reactors for use in the
practice of the Conversion Process at a Licensed Plant. Licensee shall have no
right to make, have made, or sell any reactor based on Reactor Information
except as expressly provided in this Section 2.02.
2.03 Subject to the terms and conditions of this Agreement, Licensor grants
to Licensee (a) the right to purchase from Licensor the appropriate
Fischer-Tropsch Catalyst and, from either Licensor or a catalyst vendor
designated by Licensor, the appropriate autothermal reforming catalyst for use
in the practice of the Conversion Process at a Licensed Plant to manufacture
Synthetic Product solely for the purpose of producing, using, and selling
Marketable Products anywhere in the world and (b) a limited non-exclusive,
non-transferable (except as provided in Section 2.06 and Article 8) right and
license under Licensor Catalyst Patent Rights and Licensor Catalyst Information
to use such catalysts in the practice of the Conversion Process at a Licensed
Plant to manufacture Synthetic Product solely for the purpose of producing,
using, and selling Marketable Products anywhere in the world. The purchase price
for any catalyst purchased by Licensee from Licensor shall be equal to the
lowest of (a) Licensor's cost to produce or have produced such catalysts, plus a
markup of twenty five percent (25%), or (b) if, during the twelve (12) month
period prior to a catalyst purchase by Licensee, the same catalyst (at
comparable quantities) was sold by Licensor to a third party at a markup less
than twenty five percent (25%), Licensee shall be entitled to the lower markup
for its current catalyst purchase. Licensor will, no more than once per year,
provide Licensee reasonable access to the relevant books of Licensor to verify
the lowest markup for such catalyst. Licensee shall have no rights to make,
have made, or sell any Licensor Fischer-Tropsch Catalyst or autothermal
reforming catalyst, which is proprietary to Licensor. Beyond the initial
catalyst fill, for a Licensed Plant, Licensee will have the right to buy
replacement catalyst from other catalyst suppliers. If Licensor specifies in
the Process Design Package an autothermal reforming catalyst commercially
available from a third party, Licensee shall have the right to purchase such
catalyst directly from a third party.
2.04 In the event Licensor for any reason is unable to supply Licensee with
such amounts of Fischer-Tropsch Catalyst as may be reasonably necessary for the
operation of a specific Licensed Plant, Licensor shall provide to one or more
catalyst vendors designated by Licensor the necessary catalyst recipe, together
with a non-exclusive limited license to make and sell such Fischer-Tropsch
Catalyst to Licensee for use in such Licensed Plant, and Licensee shall have the
right to purchase such Fischer-Tropsch Catalyst from such vendor for use in such
Licensed Plant on the same terms (including price) as set forth in Section 2.03.
2.05 Upon Licensee's written request, Licensor will execute a Site License
Agreement with respect to a specific proposed Licensed Plant if:
(a) Licensee has a Participating Interest of at least ten percent (10%) in the
proposed Licensed Plant as represented in a Request for Site License Agreement
(Attachment 1);
(b) Licensee is current on all payments due under prior Site License Agreements
for all Licensed Facilities under this Agreement in accordance with their
respective terms;
(c) there is not a material default under this Agreement for which Licensee is
responsible resulting from or affecting more than one Licensed Plant; and
(d) no Person having a Participating Interest in the proposed Licensed Plant is
in material default under any agreement relating to Licensor Technology.
Until such time as the above conditions are satisfied, Licensee shall have no
right or license to use Licensor Technology at the proposed Licensed Plant.
2.06 During the term of this Agreement, Licensee may extend this Agreement
to any Affiliate, provided that Licensee shall first notify Licensor in writing
of any such extension and the acceptance of such extension by such Affiliate
pursuant to this Section 2.06. The Affiliate to which this Agreement may be
extended by Licensee shall be subject to and shall accept in writing (in the
form set forth in Attachment 2) the same obligations to which Licensee is
subjected under this Agreement and all terms and conditions of this Agreement
shall apply to such Affiliate with respect to its obligations and its rights
(except the right of extension as set forth in this Section 2.06) as if such
Affiliate had entered into this Agreement with Licensor effective as of the date
of such extension. Licensee warrants to Licensor the full performance by such
Affiliate of the obligations which are imposed upon such Affiliate as a result
of such extension of this Agreement and, notwithstanding any such extension,
Licensee shall still be liable to Licensor for all sums which become due from
such Affiliate to Licensor and for any default by such Affiliate in the
performance of its obligations under this Agreement.
2.07 Each Licensed Plant shall remain at the initial plant site for a
minimum of seven (7) years from Start-Up Date. Thereafter, Licensee may
relocate a Licensed Plant to a new plant site within the Licensed Territory
without obtaining a new Site License Agreement provided (i) request is made by
Licensee to Licensor in the form of Exhibit G of the Site License Agreement in
which Licensee agrees that the Licensed Plant will remain at the new site for
minimum of seven (7) years and (ii) the Licensee is not in default under the
Site License Agreement for the Licensed Plant. Notwithstanding the foregoing,
Licensed Plants utilizing gas from leases, concessions, or similar production
sharing arrangements in which Licensee or its Affiliates own at least a ten
percent (10%) working, net profits, equity, or other economic interest
(excluding any interest owned by a governmental entity) may, at any time, be
relocated within the geographic boundaries of any such leases, concessions, or
similar production sharing arrangements. Nothing in this Agreement shall
prohibit Licensee or its Affiliates from purchasing gas from other parties to
manufacture Synthetic Product at any Licensed Plant pursuant to this Agreement.
3. TECHNICAL ASSISTANCE
------------------------
3.01 Licensee shall purchase and Licensor agrees to furnish to Licensee, or
to a contractor designated by Licensee, a Process Design Package for each
Licensed Plant according to the terms specified in Section 5.03 of this
Agreement.
3.02 Reactor Information necessary for each Licensed Plant shall be excluded
from the Process Design Package. However, those elements of Reactor Information
which are necessary to fabricate such reactors will be provided by Licensor
directly to the Reactor Vendors selected by Licensee to manufacture the
autothermal reformer and Fischer-Tropsch reactors from Licensor's then current
list of Reactor Vendors. Licensor may, from time to time, add or remove any
Reactor Vendor.
3.03 Except as may be set forth in a Process Design Package, the obligations
of Licensor under this Agreement do not include the performing of any basic or
detailed design, engineering, training, consulting, start-up, operating or
maintenance services with respect to any Licensed Plant. Licensor's
responsibilities for any such services in the design, construction and operation
(including maintenance) of any Licensed Plant shall be as set forth in one or
more separate written engineering services agreement(s) (if any) between
Licensor and Licensee specifically applicable to each Licensed Plant.
3.04 Licensor agrees to disclose to Licensee, upon reasonable request but at
least once a year, (a) additions to Licensor Technology and (b) improvements or
inventions developed by Licensor or its Affiliates relating to Licensor
Technology which have been commercially used or which Licensor determines are in
a stage of development suitable for commercial use. Licensor shall permit
Licensee to reasonably inspect, at mutually convenient times, the operating
procedures, process conditions, material balances, energy consumption, catalyst
performance, and analyses of internal streams and/or Synthetic Product at
Licensor's pilot plant which are applicable to such improvements or inventions.
3.05 Licensee shall provide Licensor 90 days advance written notice of the
anticipated Start-up Date for each Licensed Plant. Licensee agrees to permit
Licensor and/or its representatives access to Licensee's Licensed Plants at
reasonable and convenient times, for inspection and if requested by Licensee,
training, by representatives of Licensor. Licensor shall have the right to
charge Licensee a reasonable fee for any training as may be agreed with the
Licensee on a case by case basis.
4. LICENSEE GRANTS TO LICENSOR
------------------------------
4.01 Licensor may, no more than one (1) time per year, request and Licensee
agrees to disclose to Licensor in writing any Inventions or Improvements related
to the Conversion Process.
4.02 Subject to the terms and conditions of this Agreement, Licensee grants
to Licensor a limited, non-exclusive, irrevocable, royalty free, worldwide (i)
right and license under Licensee Patent Rights and (ii) right and license to use
Licensee Technical Information for the design, construction, operation and
maintenance (including modify, expand and replace) of facilities practicing the
Conversion Process, together with the right to grant corresponding sublicenses
of the Licensee Patent Rights and Licensee Technical Information to other
licensees of Licensor Technology for use at a licensed plant practicing the
Conversion Process, provided that any such licensee to whom a sublicense is to
be granted shall have granted reciprocal rights to Licensor to use and grant
sublicenses under such licensee's patent rights and technical information for
the benefit of Licensee. Licensee shall have the right to charge Licensor a
reasonable fee for any training with respect to Licensee Patent Rights and
Licensee Technical Information as may be agreed with the Licensor on a case by
case basis.
4.03 Should Licensee, during the term of this Agreement, make any patentable
Inventions or Improvements, Licensee may, at its sole discretion, file patent
applications with respect to such Inventions or Improvements in its own name and
at its own expense, and take such other steps as are necessary, in the sole
judgment of Licensee, to protect its rights in such Inventions or Improvements.
In the event Licensee declines to file any patent application with respect to
any Inventions or Improvements, it shall promptly notify Licensor in a timely
manner to allow Licensor, at its sole discretion, to file such patent
application at its sole expense, and to take such other steps as are necessary,
in its judgment, to protect the Parties' rights in such Inventions or
Improvements, subject to Licensee's obligation to account to third parties
therefore and provided that title to such Inventions or Improvements shall
remain in Licensee.
4.04 Licensor and Licensee each agree that they will take all actions and
execute all documents and shall cause their employees, agents and contractors to
take all actions and execute all documents as are necessary or appropriate to
carry out the provisions of this Article 4 or to assist each other in the
preparation, filing and prosecution of patent applications or securing such
protection referenced in this Article 4 when so requested.
4.05 Licensee shall permit Licensor and/or its representatives to reasonably
inspect, at mutually convenient times, the operating procedures, process
conditions, material balances, energy consumption, catalyst performance, and
analyses of internal streams and/or Synthetic Product which are applicable to
Licensee's Inventions or Improvements at any Licensed Plant incorporating such
Inventions or Improvements.
4.06 Licensee agrees to provide, from time to time and upon request by
Licensor, samples of Marketable Products as they are produced by any of
Licensee's Licensed Plants to verify compliance with this Agreement. Licensor
agrees to limit its analysis of samples of Marketable Products to those analyses
necessary to determine compliance with the definition of Marketable Products.
5. LICENSE AND OTHER FEES
--------------------------
5.01 In consideration for the rights granted to Licensee by Licensor under
this Agreement, Licensee shall pay Licensor a non-refundable amount of $________
U.S. dollars upon execution of this Agreement. This amount shall be fully
credited against the first $_________ U.S. dollars in License Fees payable by
Licensee to Licensor as provided in Attachment 3.
5.02 Licensee agrees to pay fees to Licensor in accordance with Attachment 3
for each Licensed Plant.
5.03 In addition to the amounts to be paid by Licensee to Licensor under
Sections 5.01 and 5.02, Licensee agrees to pay Licensor for each Process Design
Package, a fee equal to the costs actually incurred by Licensor in preparing the
Process Design Package, plus 10% of the total of such actual cost. Such fee
shall be invoiced by Licensor to Licensee after delivery of a Process Design
Package and payment shall be due within 30 days from receipt of invoice by
Licensee.
5.04 All amounts payable under this Agreement shall be paid by Licensee to
Licensor at Licensor's address specified in Section 10.07, or to an account at a
bank specified by Licensor, in dollars of the United States of America.
5.05 In the event Licensee is required to withhold any taxes from amounts
payable to Licensor under this Agreement, Licensee agrees to provide Licensor at
the time of such withholding with a receipt or other evidence reflecting the
deposit of such taxes with the appropriate governmental agency.
6. WARRANTIES AND INDEMNITIES
------------------------------
6.01 Licensor represents and warrants that it is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Delaware, United States of America, and has full power and authority to enter
into and perform its obligations under this Agreement. The execution, delivery
and performance of this Agreement and all documents relating hereto by Licensor
have been duly and validly authorized by all requisite corporation action and
constitute valid and binding obligations of Licensor enforceable in accordance
with their respective terms.
6.02 Licensee represents and warrants that it is a corporation duly
organized, validly existing, and in good standing under the laws of the province
of Yukon, Canada, and has full power and authority to enter into and perform its
obligations under this Agreement including the right to grant the rights and
licenses as set forth in Article 4. The execution, delivery and performance of
this Agreement and all documents relating hereto by Licensee have been duly and
validly authorized by all requisite corporate action and constitute valid and
binding obligations of Licensee enforceable in accordance with their respective
terms.
6.03 Except as otherwise expressly set forth in this Agreement or other
written agreement between the Parties, LICENSOR MAKES NO AND HEREBY DISCLAIMS
ANY EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS OF ANY KIND, INCLUDING ANY
WARRENTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR ANY OTHER
WARRANTIES OR REPRESENTATIONS OF ANY KIND TO LICENSEE, INCLUDING, WITHOUT
LIMITATION, ANY WARRANTY OR REPRESENTATION WITH RESPECT TO USE OF LICENSOR
TECHNOLOGY AS AUTHORIZED HEREUNDER.
6.04 EXCEPT FOR UNAUTHORIZED DISCLOSURE OR USE OF CONFIDENTIAL INFORMATION
OR UNAUTHORIZED USE OF PATENT RIGHTS UNDER THIS AGREEMENT, IN NO EVENT SHALL A
PARTY BE LIABLE TO THE OTHER FOR ANY SPECIAL, INDIRECT, INCIDENTAL, PUNITIVE, OR
EXEMPLARY DAMAGES, INCLUDING WITHOUT LIMITATION, LOST PROFITS OR SAVINGS,
REGARDLESS OF THE FORM OF ACTION GIVING RISE TO SUCH A CLAIM FOR SUCH DAMAGES,
WHETHER IN CONTRACT OR TORT INCLUDING NEGLIGENCE, EVEN IF LICENSOR OR LICENSEE
HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. BUT IF A PARTY IS FOUND
LIABLE, DESPITE THE ABOVE LANGUAGE, TO THE OTHER PARTY FOR SPECIAL, INDIRECT,
CONSEQUENTIAL, INCIDENTAL, PUNITIVE, OR EXEMPLARY DAMAGES THEN THE MAXIMUM LIMIT
OF SUCH DAMAGES IS AGREED TO BE $5,000.
6.05 A Party will promptly advise the other Party in writing of any claim
made or lawsuit alleging infringement of any patent or copyright or
misappropriation of Confidential Information based on the design, construction
and/or operation of Licensed Facilities (including Synthetic Product or
Marketable Products produced from Licensed Facilities).
(a) If Licensee has made a modification to the Process Design Package,
with respect to a Licensed Plant, and infringement or misappropriation by such
Licensed Plant would not exist in the absence of Licensee's modification,
Licensee will be solely responsible for any claim or lawsuit. Licensee will (i)
promptly undertake at its own expense the defense of the claim or lawsuit, and
(ii) hold Licensor, its Affiliates, and their officers, directors, and employees
harmless from any liability, damages and other sums that may be assessed in or
become payable under any decree or judgment by any court or other tribunal which
results from such claim or lawsuit and from any attorneys fees, costs of
litigation and other reasonable out of pocket expenses incurred in the defense
of such claim or lawsuit.
(b) If the design, construction and/or operation of a Licensed Plant which
is the basis for alleged infringement or misappropriation, is in accordance with
the designs, specifications and operating conditions (including, but not limited
to, catalysts) embodied in the Process Design Package for such Licensed Plant,
Licensor will (i) promptly undertake at its own expense the defense of the claim
or lawsuit, and (ii) hold Licensee, its Affiliates, and their officers,
directors, and employees harmless from any liability, damages and other sums
that may be assessed in or become payable under any decree or judgment by any
court or other tribunal which results from such claim or lawsuit and from any
attorneys fees, costs of litigation and other reasonable out of pocket expenses
incurred in the defense of such claim or lawsuit.
(c) A Party will render all reasonable assistance that may be required by
the other Party in the defense of claim or lawsuit alleging infringement or
misappropriation and such Party shall have the right to be represented therein
by advisory counsel of its selection and at its expense.
(d) In the event a court or other tribunal finds that infringement and/or
misappropriation has occurred not as a result of Licensee's modifications,
Licensor shall have the option, at its sole expense, to either (i) provide
designs, specifications and/or operating conditions (including, but not limited
to, catalysts) and make modifications to the Licensed Plant which avoid such
infringement and/or misappropriation without degrading the economics or
performance of the Licensed Facilities, or (ii) acquire the right to continue
using the design, construction and operating conditions (including, but not
limited to, catalysts), which were the subject of such infringement and/or
misappropriation.
(e) Except as provided in (d) above, a Party shall not settle or compromise
any claim or lawsuit alleging infringement or misappropriation without the
written consent of the other Party if such settlement or compromise obligates
the other Party to make any payment or part with any property, to assume any
obligation or grant any licenses or other rights, or to be subject to any
injunction by reason of such settlement or compromise.
6.06 Licensor agrees to indemnify and hold harmless Licensee, its
Affiliates, and their officers, directors, and employees from and against the
full amount of any and all claims, demands, actions, damages, losses, costs,
expenses, or liability whatsoever (including without limitation the costs of
litigation, including reasonable attorneys' fees), for patent infringement,
property (real and personal) damage, personal injury or death, fines, or
penalties arising in whole or in part out of the use of Licensee Patent Rights
and Licensee Technical Information in a plant operated by Licensor or Person
under license from Licensor.
6.07 Licensor agrees to indemnify and hold harmless Licensee, its
Affiliates, their officers, directors, and employees from and against the full
amount of any and all claims, demands, actions, damages, losses, costs,
expenses, or liability whatsoever (including without limitation the costs of
litigation, including reasonable attorneys' fees), for property (real and
personal) damage, personal injury or death, fines, or penalties arising in whole
or in part out of acts or omissions in the preparation and content (including
design, engineering, and specifications) of the Process Design Package for the
Licensed Facilities.
6.08 Licensee agrees to indemnify and hold harmless Licensor, its
Affiliates, their officers, directors, and employees from and against the full
amount of any and all claims, demands, actions, damages, losses, costs,
expenses, or liability whatsoever (including without limitation the costs of
litigation, including reasonable attorneys' fees), for property (real and
personal) damage, personal injury or death, fines, or penalties arising in whole
or in part out of acts or omissions outside the scope of or any modification to
the content (including design, engineering, and specifications) of the Process
Design Package for the Licensed Facilities.
6.09 Licensor's total obligation and liability to indemnify and hold
Licensee harmless for any and all claims (i) under this Article 6, including but
not limited to all expenses incurred by Licensor in assuming Licensee's defense,
making modifications to the Licensed Plant and for paying any judgments or
settlements on Licensee's behalf, or for any other reason contemplated by this
Article 6, (ii) for failure to meet any process guarantees that may have been
provided under a separate agreement, or (iii) for any other indemnification made
by Licensor pursuant to this Agreement, shall in no event exceed 50% of the
total License Fees received from the Licensee for any Licensed Plant that is
subject to the above claims.
6.10 Licensee's total obligation and liability to indemnify and hold
Licensor harmless for any and all claims (i) under this Article 6 including but
not limited to all expenses incurred by Licensee in assuming Licensor's defense
and for paying any judgments or settlements on Licensor's behalf, or for any
other reason contemplated by this Article 6, or (ii) for any other
indemnification made by Licensee pursuant to this Agreement, shall in no event
exceed 50% of the total License Fees received by Licensor from Licensee for any
Licensed Plant that is subject to the above claims.
7. CONFIDENTIALITY AND LIMITATIONS
-----------------------------------
7.01 Licensee agrees that any Confidential Information disclosed by Licensor
or an Affiliate directly or indirectly to Licensee during the period from the
date of Licensee's execution of the Confidentiality Agreement through the term
of this Agreement, will be kept confidential by Licensee for a period of fifteen
(15) years after the date of each disclosure, but not to exceed five (5) years
after the termination of this Agreement or fifteen (15) years from the Effective
Date, whichever last occurs, with the same standard of care Licensee uses to
protect its own similar confidential information and, except as otherwise
provided in this Agreement, will not be disclosed to others or copied or
duplicated (except for internal use), and will be used by Licensee solely as it
relates to this Agreement, and for no other purpose, including Licensee's
research, development or commercial activities related to the Conversion Process
for its own account. Licensee may disclose such Confidential Information to
third parties who have executed a secrecy agreement with Licensor with
confidentiality terms no less restrictive than those set forth in this Section
7.01. To the extent reasonably necessary to carry out the purposes of this
Agreement, Licensee may disclose any of the foregoing information to an
Affiliate, provided that the Affiliate has agreed in writing to be bound by this
Agreement.
7.02 Licensor agrees that any Confidential Information disclosed by Licensee
or an Affiliate directly or indirectly to Licensor during the term of this
Agreement will be kept confidential by Licensor for a period of fifteen (15)
years after the date of each disclosure, but not to exceed five (5) years after
the termination of this Agreement or fifteen (15) years from the Effective Date,
whichever last occurs, with the same standard of care Licensor uses to protect
its own similar confidential information, and except as otherwise provided in
this Agreement will not be disclosed to others or copied or duplicated, and will
be used by Licensor solely in the development, marketing and licensing of the
Conversion Process, and for no other purpose. Licensor may disclose such
Confidential Information to third parties who have executed a secrecy agreement
with confidentiality terms similar to the confidentiality provisions of this
Agreement. To the extent reasonably necessary to carry out the purposes of this
Agreement, Licensor may disclose any of the foregoing information to an
Affiliate, provided that the Affiliate has agreed in writing to be bound by the
relevant provisions of this Agreement.
7.03 A Party shall not be subject to the restrictions set forth in Sections
7.01 and 7.02 as to the disclosure, duplication or use of disclosed Confidential
Information, which the receiving Party can prove by competent evidence (a) was
already known to the receiving Party or an Affiliate prior to the disclosure
thereof by the disclosing Party; (b) is or becomes part of the public knowledge
or literature without breach of this Agreement by the receiving Party but only
after it becomes part of the public knowledge or literature; (c) shall otherwise
lawfully become available to the receiving Party or an Affiliate from a third
party but only after it becomes so available and provided the third party is not
under obligation of confidentiality to disclosing Party; or (d) is developed by
the receiving Party or an Affiliate independently of any disclosure by the
disclosing Party to the receiving Party or an Affiliate under this Agreement or
independently of any joint research and development activities of Licensee and
Licensor which may occur under a separate agreement. Any Confidential
Information disclosed shall not be deemed to fall within the confidentiality
exceptions of this Section 7.03 merely because it is embraced by more general
information. In any such case set forth in Section 7.03(a), (b), (c), and (d),
the receiving Party shall keep confidential and not disclose to any third party
that any such information was also made available to or acquired by the
receiving Party or an Affiliate from the disclosing Party, and such release from
the secrecy obligation shall not be considered as a license to make, sell, use
or operate under any of the disclosing Party's proprietary rights.
7.04 The receiving Party shall limit access to the Confidential Information
disclosed to it to those employees of the receiving Party or an Affiliate who
reasonably require the same and who are under a legal obligation of
confidentiality on the terms set forth in Section 7.01 and Section 7.03. The
receiving Party shall be responsible to the disclosing Party for the performance
by its employees of their confidentiality obligations. The receiving Party
shall keep a record of any Confidential Information marked "Limited Access" and
the identity of each employee who has access to Confidential Information so
marked. The receiving Party shall inform the other Party of the identity of
each such employee within 30 days of disclosure.
7.05 In the event that a Party which is recipient of Confidential
Information from the other Party is requested or required by deposition,
interrogatory, request for documents, subpoena, civil investigative demand or
similar process to disclose any such Confidential Information, the receiving
Party shall provide the disclosing Party with prompt written notice of such
request or requirement prior to making the requested disclosure, and shall
cooperate with the disclosing Party so that the disclosing Party may seek a
protective order or other appropriate remedy or, if the disclosing Party so
elects, waive compliance with the terms of this Agreement. In the event that
such protective order or other remedy is not obtained, the receiving Party may
disclose only that portion of the Confidential Information which the disclosing
Party is advised by counsel is legally required to be disclosed.
7.06 The Parties agree that they will each take all actions and execute all
documents, and shall cause their employees, agents and contractors to take all
actions and execute all documents as are necessary or appropriate to carry out
the provisions of this Article 7 or to assist each other in securing protection
of intellectual property and Confidential Information referenced in this Article
7.
7.07 With respect to any catalyst furnished by Licensor to Licensee for use
by Licensee at the Licensed Facilities, Licensee will not, and Licensee will not
allow any other person to, analyze, break down, reverse engineer or otherwise
seek to determine the chemical composition, except for loss on ignition and bulk
density, of any such catalyst, except that Licensee shall be entitled to (a)
perform analyses that Licensor may from time to time specifically authorize in
writing, to the extent required for monitoring the performance of the Licensed
Facilities and for regeneration, reclamation or disposal of spent catalysts,
such authorization not to be unreasonably withheld, and (b) provide results of
the aforementioned analyses to other parties to the extent required for
regeneration, reclamation or disposal of spent catalysts, but only after such
other parties have entered into an agreement with Licensor in a form attached
hereto as Exhibit E of the attached Site License Agreement. Licensor will be
provided with a copy of all such analyses which has been approved in writing
prior to release to other parties.
8. ASSIGNMENT AND TRANSFERS
----------------------------
8.01 Except for assignment to an Affiliate or the successor in interest, by
purchase or otherwise, of Licensee (but specifically excluding Exxon
Corporation, Royal Dutch Shell, Sasol Limited or any entity in which they have
an equity interest), which may be made without written consent of Licensor, this
Agreement shall not be assignable by Licensee without the prior written consent
of the Licensor, which consent will not be unreasonably withheld. Licensee will
promptly notify Licensor in writing of any assignment to an Affiliate, or such
successor in interest. Except for assignment to an Affiliate, or such successor
in interest, any attempted assignment of this Agreement by Licensee without
consent of Licensor shall be void.
8.02 In the event of the transfer of all or a portion of Licensee's
Participating Interest in any Licensed Plant to another Person other than an
Affiliate, Licensee shall obtain such Person's unconditional execution of the
Site License Transfer Letter set forth in Exhibit F of the Site License
Agreement, and submit such Letter to Licensor, whereupon if Licensor gives its
written consent, such consent not to be unreasonably withheld, then such Person
to whom such Site License Agreement shall have been transferred shall be
substituted for Licensee for all purposes in connection with such Licensed
Plant. Licensor's refusal to consent may be justified by Licensor's reasonable
concern that assignee will not comply with the terms of this Agreement. A
transfer of Licensee's Participating Interest does not relieve Licensee of its
confidentiality obligations under this Agreement with respect to Confidential
Information associated with such transferred Participating Interest.
<PAGE>
9. TERM AND TERMINATION
------------------------
9.01 This Agreement shall extend for a period of fifteen (15) years
following the Effective Date, or five (5) years following the effective date of
the last Site License Agreement issued under this Agreement, whichever last
occurs.
9.02 Upon the written notice from Licensor to Licensee of any material
default under this Agreement (including any material default under a Site
License Agreement), other than as noted in Section 2.05 (c), all rights of
Licensee under Section 2.05 of this Agreement, shall be suspended until such
default is cured by Licensee. Licensee's or an Affiliate's right to operate any
Licensed Plant which is in compliance with its Site License Agreement shall not
be affected by either a default under this Agreement or a default under another
Site License Agreement for another Licensed Plant. If a material default under
this Agreement shall continue for a period of one year following written notice
of such default to Licensee from Licensor without being cured by Licensee, then
Licensor shall have the right to (a) suspend all rights of Licensee under this
Agreement, or (b) terminate this Agreement upon written notice to Licensee. The
actions by Licensor under this Section 9.02 shall not prejudice Licensor from
enforcing any claim which it may have for damages or otherwise on account of the
default.
9.03 Termination of this Agreement shall not:
(a) relieve Licensee of its obligations to account for and pay all amounts
due Licensor under this Agreement and all Site License Agreements executed by
Licensee under this Agreement;
(b) affect any rights granted Licensee under Site License Agreements in
effect on the date of termination;
(c) affect any rights granted under Article 4 with respect to Licensee
Patent Rights and Licensee Technical Information, which shall survive
termination in accordance with its terms; or
(d) affect the obligations of Licensor and Licensee under Articles 6 and 7
and Sections 8.02 and 10.02, which shall survive termination in accordance with
their terms.
9.04 No Party to this Agreement shall be in default in performing its
obligations under this Agreement to the extent that performing such obligations,
or any of them, is delayed or prevented by revolution, civil unrest, strike,
labor disturbances, epidemic, accident, fire, lightening, flood, storm,
earthquake, explosion, blockage or embargo, or any law, proclamation, regulation
or ordinance, or any other cause that is beyond the control and without the
fault or negligence of the Party asserting the benefit of this Section 9.04.
Each Party shall do all things reasonably possible to remove the cause of such
default.
9.05 Licensee shall have the right to terminate this Agreement in its sole
discretion, with or without cause, upon the delivery of written notice of
termination to Licensor no less than 90 days prior to the date of such
termination.
10. MISCELLANEOUS
------------------
10.01 This Agreement embodies the entire intent of the Parties and merges
all prior oral and written agreements between the Parties hereto with respect to
subject matter hereof. No stipulation, agreement, representation or
understanding of the Parties hereto shall be valid or enforceable unless
contained in this Agreement or in a subsequent written agreement signed by the
Parties hereto. In the event of a conflict between this Agreement and a Site
License Agreement executed pursuant to this Agreement, this Agreement will
govern.
10.02 THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK, UNITED STATES OF AMERICA, WITHOUT REGARD TO
CONFLICT OF LAW PROVISIONS THEREOF. The Parties expressly and irrevocably
consent and submit to the jurisdiction of any federal court sitting in the state
of Oklahoma and agree that, to the fullest extent allowed by law, only such
Oklahoma federal courts, to the exclusion of all others, shall have jurisdiction
over any action, suit or proceeding arising out of or relating to this
Agreement. Provided, however, that in the event that no federal court in the
State of Oklahoma has jurisdiction over the Parties and the subject matter of
any action, suit, or proceeding, the Parties expressly and irrevocably consent
and submit to the jurisdiction of any state court sitting in the state of
Oklahoma and agree that, to the fullest extent allowed by law, only such
Oklahoma state courts, to the exclusion of all others, shall have jurisdiction
over any such action, suit or proceeding arising out of or relating to this
Agreement. The Parties each irrevocably waive, to the fullest extent allowed by
law, any objection either of them may have to the laying of venue of any such
suit, action or proceeding brought in any state or federal court sitting in, the
state of Oklahoma based upon a claim that such court is inconvenient or
otherwise an objectionable forum. Any process in any action, suit or proceeding
arising out of or relating to this Agreement may, among other methods, be served
upon any Party by delivering it or mailing it to their respective addresses set
forth herein. Any such delivery or mail service shall be deemed to have the
same force and effect as personal service in the State of Oklahoma.
10.03 This Agreement does not grant and shall not be construed as granting
any license, authorization or consent, to either Party by the other Party
hereto, to use any name, trademark, service mark or slogan of the other Party.
A Party shall not use the other Party's name without written consent, except for
the identification of the other Party as a Licensee or Licensor of Licensor
Technology. The terms of this Agreement will be maintained in confidence by
each Party subject to the same standard of care each Party uses to protect its
confidential information, except as required by law. A press release which
includes the name of the other Party must have prior written approval of the
other Party, except as required by law.
10.04 Failure of either Licensor or Licensee at any time or from time to
time to exercise any of its rights under this Agreement or to insist upon strict
performance of the other Party's obligations hereunder shall not be deemed a
waiver of or to limit any of such rights or obligations with respect to such
rights or obligations or any subsequent occurrence.
10.05 Licensee may publish the existence of this Agreement but agrees not to
disclose, without the written consent of the Licensor, any of the terms of this
Agreement or any portion thereof, or any amendment concerning the same, except
to Persons directly involved with design, financing, construction, or operation
of a Licensed Plant on a need-to-know basis or as required by law.
10.06 Licensee agrees that all Licensor information, technology, patents,
and the product produced directly by the use thereof, when used outside the
United States of America, shall be used by Licensee subject to and in accordance
with regulations of any department or agency of the United States of America and
Licensee shall not re-export or transship or agree to re-export or transship any
such Licensor information, technology, patents, and the product produced
directly by the use thereof to any destination prohibited by United States law
including, without limitation, United States executive orders and administrative
orders, rules, and regulations or to any destination requiring the approval of
the United States government for such re-exportation or transshipment until a
request to do so has been submitted to and approved by the United States
government and notice of such approval has been provided to Licensor. Licensee
shall not (i) enter into a transaction or dealing, including, without
limitation, re-exporting the Licensed Technology, or causing, financing,
guaranteeing, authorizing or facilitating an action to enter into a transaction
or dealing, that might reasonably be considered a violation of United States law
by either Licensor or Licensee, or (ii) disclose information in a way that might
reasonably be considered a violation of United States law by either Licensor or
Licensee.
10.07 Should any part or provision of this Agreement be held unenforceable
or in conflict with the law of any state or of the United States of America or
of any foreign country, the validity of the remaining parts or provisions shall
not be affected by such holding.
<PAGE>
10.08 All notices hereunder shall be addressed to the Parties as follows:
(a) If to Licensor:
Syntroleum Corporation
1350 S. Boulder, Suite 1100
Tulsa, OK 74119-3295
Fax No.: (918) 592-7979
Phone No.: (918) 592-7900
ATTN: Office of the President
with copy to:
Syntroleum Corporation
1350 S. Boulder, Suite 1100
Tulsa, OK 74119-3295
Fax No.: (918) 592-7979
Phone No.: (918) 592-7900
ATTN: Office of the General Counsel
(b) If to Licensee:
Ivanhoe Energy Inc.
9th Floor, Waterfront Center
200 Burrard Street
Vancouver, B.C. V6C 3L6
CANADA
Attn: E. Leon Daniel
with copy to:
1200 Discovery Way
Bakersfield, CA 93309
Attn: Oscar Blake
Any notice required or permitted to be given under this Agreement by one of the
Parties to the other shall be deemed to have been sufficiently given for all
purposes hereof if mailed by registered or certified mail, postage prepaid,
addressed to such Party at its address indicated above, electronically
transmitted and acknowledged by the other Party or by actual delivery of written
notice to the other Party.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date
set forth above.
Licensor
SYNTROLEUM CORPORATION
By:_________________________________
Mark A. Agee, President/COO
Date:_______________________________
Licensee
IVANHOE ENERGY INC.
By:_________________________________
E. Leon Daniel, President & CEO
Date:_______________________________
<PAGE>
ATTACHMENT 1
------------
Request for Site License Agreement
--------------------------------------
Syntroleum Corporation
1350 S. Boulder, Suite 1100
Tulsa, OK 74119-3295
Attn: Office of the President
Gentlemen:
Please issue, for immediate execution, a Site License Agreement of the form
identical to Attachment 4 of our Volume License Agreement dated _____________,
20__, covering the construction and operation of a Licensed Plant, in which we
have, or intend to have, a Participating Interest upon completion of other
related agreements. Issue the Site License Agreement in the name of
_____________________________ as the Licensee pursuant to the Volume License
Agreement. The following information is provided for inclusion in the execution
copies:
Licensed Plant Location:
City: _____________________________ State/Province: ______________________
Country: __________________________ Onshore/Offshore: ___________________
Latitude: __________________________ Longitude: _________________________
Maximum daily design capacity, as defined by the Process Design Package is
__________ Barrels of Synthetic Product per day. To the extent that more than
one Syntroleum licensee is a participant in the Licensed Plant, the design
capacity of such Licensed Plant should be applied against such licensees'
remaining aggregate maximum daily design capacities for licensed facilities
under their respective license agreements as follows:
Aggregate Design
Entity Capacity Deduction
------ -------------------
______________________________________ ________________
______________________________________ ________________
______________________________________ ________________
Our Participating Interest in the Licensed Plant currently represents _______
percent (%) of the entire ownership interest not held by a government authority
and we (are/are not) ______ the operator of the proposed Licensed Plant.
The other ownership interests, including that held by a government authority, if
any, is as follows:
Entity Ownership Interest
------ -------------------
______________________________________ ________________
______________________________________ ________________
______________________________________ ________________
______________________________________ ________________
______________________________________ ________________
______________________________________ ________________
We agree to pay License Fees in accordance with the applicable provisions of
Attachment 3 of the Volume License Agreement.
Please forward the appropriate materials to initiate the Process Design Package
and acknowledge your receipt of this request.
Very truly yours,
____________________________,
Licensee
<PAGE>
ATTACHMENT 2
-------------
AFFILIATE EXTENSION AGREEMENT
-------------------------------
THIS AGREEMENT, effective as of the _______ day of _______________, _____, by
and between ___________________________________________, a ______________
corporation (hereinafter "Affiliate-Licensee") and
_________________________________________, a _____________________ corporation
(hereinafter "Licensee").
WHEREAS, Licensee and Syntroleum Corporation (hereinafter "Licensor") have
previously entered into a certain Volume License Agreement, dated
_____________________, relating to the use of Licensor Technology in practicing
the Conversion Process at Licensed Facilities in the Licensed Territory to
produce Marketable Products, such capitalized terms being defined in the Volume
License Agreement;
WHEREAS, pursuant to the terms of the Volume License Agreement, Licensee has the
right to extend the benefits of the Volume License Agreement to its Affiliates;
and
WHEREAS, Affiliate-Licensee desires to acquire the right to use Licensor
Technology in practicing the Conversion Process at Licensed Facilities in the
Licensed Territory to produce Marketable Products by extension to it by Licensee
of the benefits of the Volume License Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, the parties agree as follows:
1. Pursuant to the provisions of Section 2.06 of the Volume License
Agreement, Licensee hereby extends the Volume License Agreement to
Affiliate-Licensee for use of Licensor Technology in practicing the Conversion
Process in Licensed Facilities in the Licensed Territory to produce Marketable
Products.
2. Affiliate-Licensee hereby accepts the extension to it of the Volume
License Agreement as set forth in Paragraph 1 above and agrees that it shall be
subject to the same obligations to which Licensee is subject under the Volume
License Agreement, and that all of the terms and conditions of the Volume
License Agreement shall apply to it with respect to both its obligations and
rights (except for the right of extension as set forth in Section 2.06 of the
Volume License Agreement) as if Affiliate-Licensee had entered into the Volume
License Agreement effective as of the date of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set
forth above.
LICENSEE AFFILIATE-LICENSEE
______________________________ _______________________________
(COMPANY) (COMPANY)
By:___________________________ By:_____________________________
Title:________________________ Title:__________________________
Acknowledged and
Agreed to this ___ day
of _______, ________.
Syntroleum Corporation
By:_______________
<PAGE>
ATTACHMENT 3
------------
LICENSE FEE CALCULATION
-----------------------
I. For purposes of this Attachment 3, the following terms shall have the
meanings ascribed thereto:
A. "LICENSED PLANT" means the Licensed Plant in which a Site License
Agreement for such plant is issued to and remains in the name of the Licensee
who has executed this Agreement with Licensor and, in which the Participating
Interest held by Licensee, or collectively by Licensee and any other Person who
has executed a license agreement (which is applicable to the Licensed Plant)
with Licensor, represents at least 10% of the entire Participating Interest not
held by a governmental authority regardless of operatorship of the Licensed
Plant.
B. "ROYALTY RATE" shall mean (i) the lowest royalty rate per Barrel of
Synthetic Product accepted by Licensor for a Site License Agreement with a
non-Affiliate for a facility of comparable size, in the Licensed Territory,
which is not under a master preferred license agreement, during the twelve (12)
months immediately preceding the execution date of the applicable Site License
Agreement under this Agreement, or (ii) if no such Site License Agreement has
been executed during the twelve (12) months immediately preceding, then the
royalty rate per Barrel of Synthetic Product in the last Site License Agreement
with a non-Affiliate, in the Licensed Territory, executed by Licensor, which is
not under a master preferred license agreement, or (iii) if none of the
foregoing applies, then US$______ per Barrel of Synthetic Product. Market
Royalty Rate does not include the catalyst price as provided for under Section
-------
2.03 of this Agreement.
---
II. For each Site License Agreement executed for Licensed Plants under this
Agreement, Licensee agrees to pay License Fees to Licensor on a prepaid license
basis as follows:
A. Licensee agrees to pay Licensor a one-time, prepaid License Fee
calculated in accordance with the following formula:
License Fee = "C" x 350 x 7.5 x "R"
<PAGE>
wherein:
"C" = the maximum daily design capacity, as defined by the Process Design
Package, of such Licensed Plant to produce Marketable Products measured in
Barrels of Synthetic Product per day for which such Licensed Plant is originally
designed and constructed, and
"R" = the Royalty Rate.
and payable in installments as follows:
(i) 20% within thirty (30) days after the execution of the Site License
Agreement for such Licensed Plant;
(ii) 30% within thirty (30) days after delivery of the Process Design
Package or within one hundred twenty (120) days after the execution of the Site
License Agreement for such Licensed Plant, whichever first occurs;
(iii) 20% within thirty (30) days after the commencement of field
construction move-in;
(iv) 30% within one-hundred and twenty (120) days after the Start-Up Date of
the Licensed Plant or a successful Performance Test as specified in the Process
Guarantee and Performance Test Agreement, whichever first occurs.
B. Capacity Adjustments: In the event the actual production capacity of any
Licensed Plant, under II.A. above, is determined to have either exceeded the
original maximum daily design capacity established in its Site License Agreement
or is increased through major equipment modification, by more than five percent
(5%) or by more than 500 barrels per day, at any time after the Start-up Date,
Licensee shall pay Licensor an additional License Fee, on a prepaid basis, equal
to the difference between (a) the prepaid License Fee as would have been
calculated with the higher production capacity for such Licensed Plant
substituted for "C" in the calculation method set forth in II.A. above, and (b)
the License Fee as would have been calculated for such Licensed Plant by the
method set forth in II.A. above using the original maximum daily design capacity
established in each Site License Agreement. The incremental License Fee due
will be reduced by any previous incremental adjustments. Such additional
License Fee shall be payable within thirty (30) days after the end of the
calendar year in which such increase in production capacity of such Licensed
Plant occurs. Incremental License Fees for increased production capacity in any
Licensed Plant shall not be due if the increased production capacity is the
result of the initial use of Licensee Patent Rights or Licensee Technical
information. The total cumulative incremental capacity adjustments under each
Site License Agreement will be limited to 50 percent of the initial maximum
daily capacity under such Agreement.
III. Upon payment of all fees due under the Site License Agreement for each
Licensed Plant, Licensee shall be deemed to have acquired a fully paid license
for such Licensed Plant up to the original maximum daily design capacity or any
adjusted daily design capacity made under the provisions of II.B. above. Any
additional incremental increases in the Licensed Plant capacity will be subject
to additional License Fees as calculated under Incremental Adjustments defined
under II. above.
IV. All payments required hereunder shall include a statement showing the
details supporting the calculation of the License Fees being paid. Licensee
shall keep accurate and complete records of all natural gas feedstock processed
(volume and composition) and all Synthetic Product produced at and either used
internally within or removed from each Licensed Plant to enable verification of
statements and payments rendered to Licensor hereunder. Licensee agrees to
permit Licensor, at Licensor's expense, to inspect such records on reasonable
notice and at reasonable intervals during normal business hours to verify the
fees paid and payable under this Agreement.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10Q
FOR THE PERIOD ENDING MARCH 31, 2000 AND IS QUALIFIED IN IT'S ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 18667
<SECURITIES> 3441
<RECEIVABLES> 173
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 22624
<PP&E> 0 <F1>
<DEPRECIATION> 0 <F1>
<TOTAL-ASSETS> 38585
<CURRENT-LIABILITIES> 3177
<BONDS> 0
0
0
<COMMON> 350
<OTHER-SE> 20945
<TOTAL-LIABILITY-AND-EQUITY> 38585
<SALES> 3538
<TOTAL-REVENUES> 3875
<CGS> 3078
<TOTAL-COSTS> 6393
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5352)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5352)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5352)
<EPS-BASIC> (.20)
<EPS-DILUTED> (.20)
<FN>
<F1> DISCLOSURE IS NOT REQUIRED ON INTERIM FINANCIAL STATEMENTS.
</TABLE>
