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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-23634
KFX INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-1079971
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1999 BROADWAY, SUITE 3200, DENVER, COLORADO USA 80202
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(303) 293-2992
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
Common Stock, $.001 par value American Stock Exchange
================================================================================
Securities registered pursuant to Section 12(g) of the Act: None
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 proceeding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will no be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 24, 1997, the aggregate market value of the Registrant's common
stock held by non-affiliates of the Registrant was approximately $41,115,000.
At March 24, 1997, 23,926,040 shares of common stock of the Registrant were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive
Proxy Statement for the Annual Meeting of Shareholders to be held on June 19,
1997 are incorporated by reference into Part III.
<PAGE>
KFX INC.
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
<TABLE>
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PAGE NO.
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<S> <C> <C>
PART I
Item 1. Business ....................................................................................... 1
Item 2. Properties ..................................................................................... 11
Item 3. Legal Proceedings .............................................................................. 11
Item 4. Submission of Matters to a Vote of Security Holders ............................................ 11
PART II
Item 5. Market for Common Stock and Related Stockholder Matters ........................................ 12
Item 6. Selected Financial Data ........................................................................ 13
Item 7. Management's Discussion and Analysis of Financial Condition and.................................
Results of Operations ......................................................................... 14
Item 8. Financial Statements and Supplemental Data ..................................................... 18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures ..................................................................... 18
PART III
Item 10. Directors and Executive Officers of the Registrant ............................................. 19
Item 11. Executive Compensation ......................................................................... 19
Item 12. Security Ownership of Certain Beneficial Owners and Management ................................. 19
Item 13. Certain Relationships and Related Transactions ................................................. 19
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ................................ 20
SIGNATURES...................................................................................... 23
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
KFX Inc. (the "Company"), a Delaware corporation, is engaged in the
business of licensing and commercializing a technology that enhances the
combustion characteristics of coal and other carbonaceous solid fuels (the "K-
Fuel Technology" or "Technology"). The K-Fuel Technology uses heat and pressure
to physically and chemically transform high-moisture, low-energy per pound coal
and other organic feedstocks into a lower-moisture, high-energy solid fuel ("K-
Fuel").
The K-Fuel Technology is comprised of three groups, or Series, of
patents. The Series "A" and Series "B" Technology patents are based on hot gas
and steam heat-transfer mediums, respectively. The Series "C" Technology is
based on a nitrogen heat-transfer medium. The principal difference between the
Series "A" and "B" Technologies and the Series "C" Technology is that Series "C"
is based on a more simplified design with respect to the manufacturing equipment
and facilities, resulting in lower capital costs. The Company anticipates that
the Series "C" Technology will be primarily used for coal product manufacturing
facilities, whereas the Series "A" and "B" Technologies will be primarily used
for renewable resource (e.g., bagasse, municipal solid waste, sludge and wood
waste, collectively referred to as "biomass") fuel product manufacturing
facilities. The Company is currently focusing all of its commercialization
efforts on the development of projects for the manufacture of coal fuel product
using the Series "C" Technology. However, the Company intends to pursue the
development of biomass fuel manufacturing plants at such time as a sufficient
revenue stream exists from coal product plants. To date, one commercial-scale
K-Fuel manufacturing facility has been constructed and is operational. See
"Current Projects - KFX Fuel Partners."
-----------------
In the Series "C" process, raw coal is crushed and screened before it
is introduced into a steel alloy processing vessel that is then pressurized and
heated indirectly using vertical tube heat exchangers. Nitrogen, serving as an
inert, non-oxidizing heat-transfer medium, is admitted to the tube side of the
processing vessel at a pressure of approximately 125 pounds per square inch
("psi"). After the nitrogen is inserted, it picks up heat from the walls of the
tube and gradually expands to approximately 800 psi. Water is released from the
coal during this expansion period. When the temperature in the tubes reaches in
excess of 520 degrees Fahrenheit, any water remaining in the coal turns to steam
and continues to process the raw coal. When the temperature of the coal reaches
approximately 650 to 740 degrees Fahrenheit, the process is complete. The
process takes 30 to 40 minutes to complete from initial loading of the raw coal
into the processing vessels to final discharge of finished K-Fuel product.
The principal benefit of the K-Fuel Technology in the United States is
that the fuel produced from the process can allow electric power producers,
manufacturers and other large-scale users of coal to meet the clean air
standards imposed by the Clean Air Act, as amended by the Clean Air Act
Amendments of 1990 (the "CAAA"). The principal benefit of the K-Fuel Technology
in foreign markets is that low-rank indigenous coal reserves can be upgraded to
provide a more cost effective and less environmentally damaging fuel source for
power producers, manufacturers and households, either in internal markets or for
export.
1
<PAGE>
Domestic Market
The CAAA is the primary stimulus for the developing United States
market for beneficiated clean coal fuel products. Specifically, Title IV of the
CAAA addresses acid rain, which is largely caused by airborne sulfur dioxide
(SO\\2\\) particulates emitted from coal-fired power plants and other industrial
facilities. The K-Fuel Technology addresses this problem by producing a coal
fuel product that has SO\\2\\ emissions significantly below the levels required
by the CAAA (the level of reduction can vary with the chemical composition of
the coal feedstock).
Title IV of the CAAA specifies a two-phase implementation schedule
that primarily targets electric utility companies with annual generating
capacities in excess of 25 megawatts (MW). Phase I implementation began on
January 1, 1995, and affected 110 large, high-emission generating plants in 21
states (primarily in the industrial midwest). The emissions limit for these
plants during Phase I is 2.5 lbs. SO\\2\\ per million Btu (MMBtu) of heat
output. Phase II will begin in the year 2000 and will affect over 1,400
electrical generating plants and other industrial users of coal. The effective
SO\\2\\ emission rate limitation under Phase II will be reduced to 1.2 lbs.
SO\\2\\ per MMBtu. When using Wyoming Powder River Basin ("PRB") coal as
feedstock material, the K-Fuel Technology produces a fuel product that has a
SO\\2\\ emission rate of approximately 0.7 to 1.0 lbs. SO\\2\\ per MMBtu.
The Company's United States marketing emphasis is directed at electric
utility companies and industrial coal users located in the industrial midwest
states. The combustion characteristics of cyclone furnace boilers, a common
boiler type of midwestern utilities originally designed to burn high-sulfur
midwestern coal, are particularly well-suited to the K-Fuel product manufactured
from PRB coal. As reported by the U.S. Department of Energy, the total domestic
market for coal fuel is approximately 1 billion tons per year ("TPY"), of which
the majority of the tonnage (in excess of 80 percent) is used by electric
utility companies. Coal-fired electricity generation currently accounts for
approximately 55 percent of the nation's total electricity supply. The Company
has estimated, based on published utility coal consumption data and responses to
Phase I and Phase II requirements of the CAAA, that a market of approximately
100 to 150 million TPY of clean coal fuel products will develop between the year
2000 and 2010. This anticipated market assumes that regulations passed under
the CAAA remain in force. Any amendments to the CAAA that reduce the specified
limits on industrial SO\\2\\ emissions could negatively impact the potential
size of the market and the domestic growth prospects of the Company. In
addition to the electric utility industry, the Company intends to market the K-
Fuel product to manufacturers and other industrial coal users that are either
subject to the SO\\2 \\provisions of the CAAA or that desire to improve their
fuel combustion performance.
Foreign Markets
The international coal market is approximately four times the size of
the United States market. The Company's objective is to concentrate on markets
where there is either a significant need for more energy efficient and
environmentally responsible fuel products, or where abundant coal reserves can
be utilized in conjunction with the K-Fuel Technology to develop a value-added
export product. The Company is currently focusing its international
commercialization efforts in Indonesia and Turkey, and to a lesser extent in the
Czech Republic. See "Current Projects."
Strategic Relationships
The Company believes that it can maximize it's chances for long-term
success in the development of the K-Fuel Technology, both domestically and
internationally, by means of strategic relationships with mature, well-
positioned companies already operating in the Company's intended markets, or
that have a value-added technology or service that complements the K-Fuel
Technology. To that end, the Company has successfully negotiated and entered
into separate strategic relationships with Thermo Ecotek Corporation and
Kennecott Energy and Coal Company.
2
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Thermo Ecotek Corporation. In August 1995, the Company entered into a
-------------------------
Stock Purchase Agreement (the "Stock Purchase Agreement"), with Thermo Ecotek
Corporation ("TCK"), a Waltham, Massachusetts environmental company engaged
primarily in non-utility electric power generation using environmentally
responsible technologies. Under the Stock Purchase Agreement, in 1995 TCK
purchased 3 million shares of the Company's common stock for $6 million,
representing an ownership in the Company of approximately 14 percent as of
December 31, 1996. In January 1997, TCK purchased an additional 1.25 million
shares of the Company's common stock for $2.5 million, increasing its ownership
in the Company to approximately 18 percent. The Stock Purchase Agreement also
provided TCK with a warrant ("Warrant A") to purchase an additional 7,750,000
shares of the Company's common stock at an exercise price of $3.65 per share,
exercisable beginning on January 1, 2000 and expiring on July 1, 2001. TCK also
obtained another warrant ("Warrant B"), that gives it the right to purchase the
number of shares of common stock of the Company that, when added to all shares
owned by TCK on the exercise date, including any shares acquired by the exercise
of Warrant A, would be sufficient to give TCK ownership of 51 percent of the
outstanding common stock of the Company, on a fully diluted basis. Warrant B
has the same exercise and termination dates as Warrant A. In August 1995, the
Company and TCK entered into a separate agreement to construct and operate a
500,000 TPY commercial-scale K-Fuel production facility. See "Current Projects
- - KFX Fuel Partners."
-----------------
Kennecott Energy and Coal Company. In April 1996, the Company
----------------------------------
entered into a joint venture agreement (the "Kennecott Agreement") with
Kennecott Alternative Fuels, Inc. ("KAFI"), a wholly-owned subsidiary of
Kennecott Energy and Coal Company ("KECC"). The joint venture, a Delaware
limited liability company named K-Fuel, L.L.C. ("K-Fuel LLC"), will be the
vehicle for further technical advancement and the commercialization of business
opportunities arising out of the K-Fuel Technology, including research and
development, sublicensing, marketing and consulting, but not including any
actual construction of facilities to produce K-Fuel products on a commercial
basis ("Commercial Projects"). Commercial Projects will be constructed by
separate entities in which KAFI, the Company or both will have an equity
interest and which will receive a sublicense from K-Fuel LLC for the K-Fuel
Technology.
Initially, the Company has a 51 percent ownership interest in K-Fuel
LLC and KAFI has a 49 percent interest. Certain research and development and
amortization expenses are allocated 100 percent to KAFI. At such time as
entities in which KAFI has an equity interest have placed into service
Commercial Projects with a collective design capacity equal to or in excess of 3
million TPY of K-Fuel product, KAFI will have a 51 percent interest in K-Fuel
LLC and the Company will have a 49 percent interest. In addition to a fee of $1
million paid to the Company in 1996 to enter into the K-Fuel LLC joint venture,
and subject to certain conditions, KAFI has agreed to pay to K-Fuel LLC such
amounts as may be necessary for all research and development costs incurred by
K-Fuel LLC, up to $4 million. During 1996, KAFI funded such research and
development costs totaling approximately $1.44 million.
In connection with the Kennecott Agreement, the Company granted K-Fuel
LLC an exclusive, worldwide, fully-paid, royalty-free right and license
(including the right to grant sublicenses) to and under the K-Fuel Technology,
except to the extent that it pertains to the beneficiation or restructuring of
coal or coal related feedstocks covered under the HFC License (as defined below)
(the "KFX License"). In addition, Heartland Fuels Corporation, an 85 percent-
owned subsidiary of the Company, granted K-Fuel LLC an exclusive, worldwide,
fully-paid, royalty-free right and license (including the right to grant
sublicenses) to and under the Series "A" and Series "B" K-Fuel Technology, as it
pertains to the beneficiation or restructuring of coal or coal-related
feedstocks (the "HFC License"). Both the KFX License and the HFC License specify
minimum terms and provisions for any sublicenses granted by K-Fuel LLC to third
parties.
3
<PAGE>
With respect to future Commercial Projects to be licensed by K-Fuel
LLC, the Company is entitled to a one-time license fee based on the annual
designed capacity of each project, to be paid one-half at the time the license
is granted, with the remaining one-half paid over a period of three years
beginning when the project begins commercial operations. The Company will also
receive a production royalty, to be paid each calendar quarter, depending on
certain levels of the projects' selling price per ton of coal product.
Additionally, the Company will be entitled to an additional payment based on a
percentage of the excess of (1) annual cash revenue from each project, over (2)
annual pre-tax cash operating costs of each project plus an annual capital
charge ("Bonus Royalty") related to each project. The Kennecott Agreement
provides that KAFI will fund 100 percent of the capital requirements for each
Commercial Project that it elects to participate in, provided however that the
Company retains the option to fund and invest up to 50 percent of the capital
requirements for any Commercial Project. As of December 31, 1996, there were no
commitments to construct any Commercial Projects under the Kennecott Agreement.
Current Projects
KFX Fuel Partners. In August 1995, the Company and TCK, acting
------------------
through wholly-owned subsidiaries KFX Wyoming, Inc. ("KFX Wyoming", 100 percent
owned by the Company) and Eco Fuels, Inc. (100 percent owned by TCK), formed KFX
Fuel Partners, L.P. ("KFP"), a Delaware limited partnership, and began
construction of a 500,000 TPY K-Fuel coal production facility (the "KFP
Project") near Gillette, Wyoming using the Company's Series "C" Technology. The
Company has a 5 percent interest in KFP, with the remaining 95 percent held by
TCK. The KFP Project was substantially completed in December 1996. On December
24, 1996, a fire destroyed one of two oil heating systems that provide the main
processing structure (comprised of four processing vessels) with heat transfer
fluid. It is estimated that KFP's insurance coverage will cover substantially
all of the costs of replacing the destroyed equipment. Commercial operations of
the KFP Project (i.e., shipment of fuel product to purchasers or stockpiling of
product on the KFP site) are expected to begin in the second quarter of 1997 for
the two processing vessels unaffected by the fire, and in the second half of
1997 for the other two processing vessels that were served by the oil heater
destroyed in the fire. The KFP Project is expected to reach its full output of
500,000 TPY beginning in 1998. TCK is the managing general partner for KFP and
makes all day-to-day operating decisions.
In addition to its 5 percent ownership of KFP, the Company will
receive a production royalty of 3 percent of the gross sales of KFP, payable
quarterly. See "Patents, Licenses and Royalty Agreements." The Company, in
conjunction with K-Fuel LLC, is also performing certain marketing activities for
KFP. The terms of any compensation for those activities are being negotiated by
the parties.
KFP has signed a Fuel Supply Agreement (the "FSA") with Ohio Valley
Electric Corporation ("OVEC"), a subsidiary of American Electric Power, Inc.
("AEP"), whereby KFP will supply K-Fuel to OVEC upon the satisfactory completion
of the test burn procedure described in the FSA. The term of the FSA will
commence upon the commencement of commercial operations of the KFP Project and
will continue until December 31, 1999 (the "Original Term"). The term may be
extended, at the option of OVEC, for a period of up to 120 months (the "Initial
Extended Term"), and may be extended further, at the option of OVEC, for a
period up to 60 months beyond the Initial Extended Term. KFP's initial shipment
of K-Fuel product to OVEC is expected to be in the second or third quarter of
1997. Total tonnage as per the FSA over the Original Term is 500,000 tons.
See "Patents, Licenses and Royalty Agreements."
KFP also has a test-burn contract with Wisconsin Power & Light for
approximately 30,000 tons of K-Fuel product to be delivered by the end of 1998.
KFP has a coal feedstock supply agreement for the KFP Project with
Fort Union, Ltd. ("Fort Union") that expires upon the earlier of (1) the
delivery to the KFP Project of a cumulative sum of 750,000 tons, or (2) December
31, 1997. See "ITEM 2 - PROPERTIES."
4
<PAGE>
The KFP Project qualifies for a tax credit available under Section 29
of the United States Internal Revenue Code entitled "Credit for Producing Fuel
From a Nonconventional Source" ("Section 29"). Section 29, which was originally
adopted in 1980, provides a tax credit to the producer of fuel from alternative
sources. The credit is equal to $3.00 in 1979 dollars for each barrel
equivalent of crude oil ("OBE"), which is defined as 5.8 million Btu. In 1995
dollars, the phase out of the credit begins as the reference price of oil (the
average price of oil for the year as announced by the Secretary of the Treasury)
exceeds $46.68 per barrel and is fully phased out if the reference price exceeds
$57.35. For 1995 the reference price was $14.62 per barrel. Section 29 applies
to qualified fuels which are produced in a facility placed in service before
July 1, 1998, pursuant to a binding written contract in effect before January 1,
1997, and which are sold after December 1992 and before January 2008.
Calculated in 1995 dollars, the tax credit is currently valued at $24.94 per ton
of the K-Fuel product (assuming a K-Fuel Btu content of 12,400 Btu per pound).
The credit per OBE and the phase-out prices for oil are adjusted annually for
inflation.
Other than alternative minimum tax provisions, generally there is no
provision for carrybacks or carryovers in the event the taxpayer cannot use the
entire alternative fuel production credit available for the taxable year. There
are also no recapture provisions which apply to this credit.
K-Fuel LLC. In January 1997, the Company and KAFI summarized its
-----------
findings and recommendations resulting from the research and development work of
K-Fuel LLC in 1996. The 1996 research and development program is part of the
first phase of an expected two-phase program. The first phase is expected to be
completed in the second quarter of 1997, with the second phase expected to begin
shortly thereafter and be completed in 1998.
The balance of the first phase of the research and development program
will be primarily devoted to product reactivity and dusting. The second phase
will be devoted to development of a new processing vessel design, including the
expected construction of a small demonstration plant based on the new vessel
design. KAFI will fund 100 percent of the remaining research and development
program of K-Fuel LLC, up to the specified amount of $4 million in the Kennecott
Agreement.
KFX Fuel Partners II. In December 1996, the Company formed KFX Fuel
---------------------
Partners II, L.P. ("KFP II"), a Delaware limited partnership, in connection with
an anticipated 635,000 TPY K-Fuel plant project ("KFP II Project") to be
constructed on a site adjacent to the existing KFP Project near Gillette,
Wyoming. The KFP II Project, if successfully financed, will be owned by third
party entities and the Company in ownership percentages yet to be determined.
The Company is currently negotiating financing terms and conditions with certain
third party entities, and is working to have the KFP II Project closed with
respect to financing and construction and operating permits in the second
quarter of 1997. The success of attracting financing and ownership partners to
the KFP II Project is highly dependent on the availability of the Section 29 tax
credit. As the credit is available only to production facilities constructed
and placed in service by July 1, 1998, the logistics and construction lead times
necessary to have a facility completed by that date require that financing and
permitting activities be completed and construction underway by the end of the
second quarter of 1997. In November 1996, the Company submitted an authority to
construct permit application to the Air Quality Division of the Wyoming
Department of Environmental Quality, which the Company expects will be granted
in the second quarter of 1997. See "ITEM 7 - MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
5
<PAGE>
Indonesia. In September 1995, KFX Indonesia, a joint venture between
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the Company and RCD Development, a Maryland partnership ("RCD"), entered into a
Memorandum of Understanding with PT Tambang Batubara Bukit Asam ("PTBA"), an
Indonesian state-owned coal-mining company, to jointly undertake a feasibility
study on the commercialization of the K-Fuel Technology in Indonesia using
PTBA's high-moisture coal as feedstock. KAFI, through its interest in K-Fuel
LLC, subsequently participated in the feasibility study. In 1996, KFX
Indonesia, KAFI and PTBA completed the feasibility study and identified a
potential K-Fuel project on the southern portion of the Indonesian island of
Sumatra ("Indonesia Project"). The proposed Indonesia Project is an
approximately 1.5 million metric ton-per-year ("MTPY") facility, with an
estimated development and construction cost of approximately $160 million,
including approximately $21 million to develop an existing coal reserve of PTBA
estimated at approximately 180 million metric tons. In 1997 or 1998, KFX
Indonesia, KAFI and PTBA expect to complete detailed engineering studies of the
proposed mining and K-Fuel plant sites to further determine the viability of the
Indonesia Project. The costs needed to complete these studies are expected to
be paid by KAFI and PTBA. Furthermore, the Company expects to have no direct
financial ownership in the initial Indonesia Project other than its license
fees, royalties and Bonus Royalty. The funding for the Indonesia Project, other
than the feasibility study costs incurred in 1996, is expected to be funded 100
percent by KAFI and PTBA. It is possible that PTBA will participate in the
Indonesia Project only as a supplier of raw coal feedstock, rather than being
the coal supplier and a partner in the Indonesia Project. Also, with the
Company's consent, KAFI may transfer its rights of participation in the
Indonesia Project to one or more international affiliates. There are no
assurances that the Indonesia Project or other possible future projects in
Indonesia will be constructed.
In January 1997, the Company and K-Fuel LLC entered into an amended
agreement with RCD regarding certain future performance fees related to a
successful Indonesia K-Fuel project. In the event that the Company and/or K-
Fuel LLC construct or license an Indonesia K-Fuel project utilizing at least 25
percent raw coal feedstock supplied by PTBA, RCD would be entitled to a fee of
$2.00 per U.S. short ton (2,000 lbs.) for the first 1.5 million tons of
installed capacity, and a fee of $1.33 per ton for the second 1.5 million tons
of installed capacity. The fees RCD derives from individual K-Fuel projects in
Indonesia supplied by PTBA coal are not expected to impact the license fees or
royalties the Company would separately receive under its license agreement with
K-Fuel LLC.
Turkey. In June 1996, the Company entered into a non-binding
------
memorandum of understanding with Soma Komur Isletmerleri A.S. ("SOMA"), a
Turkish private coal-mining company, to cooperate in the development of a
proposed 500,000 TPY K-Fuel project in the Soma Basin coal-mining region in
western Turkey ("Turkey Project"). The intended use of K-Fuel from the Turkey
Project would be for household heating markets in the urban areas of Izmir and
Bursa.
To date there are no definitive agreements with respect to a Turkey K-
Fuel production facility, and the Company is not able to predict if or when a K-
Fuel production facility will be constructed in Turkey.
Czech Republic. The Company has formed a wholly-owned subsidiary in
---------------
the Czech Republic, KFx Bohemia, s.r.o., to hold the Company's interest in a
proposed Czech joint venture called Ceska Palivova. In January 1995, the
Company entered into a Letter of Intent with Severoceske doly a.s.
("Severoceske"), a Czech mining company. Pursuant to the Letter of Intent, the
Company and Severoceske began work in 1995 on the technical, manufacturing and
marketing feasibility studies to identify a suitable K-Fuel project. The Letter
of Intent expired in January 1996, but the Company expects to continue to work
with Severoceske or other Czech companies to construct a K-Fuel project.
To date there are no definitive agreements with respect to a Czech
Republic K-Fuel production facility, and the Company is not able to predict if
or when a K-Fuel production facility will be constructed in the Czech Republic.
6
<PAGE>
PATENTS, LICENSES AND ROYALTY AGREEMENTS
The Company has patents or patent applications to the K-Fuel
Technology registered in the United States and 46 foreign countries, including
all major industrialized countries that either have significant reserves of
high-moisture lignite or subbituminous coal, or that are readily accessible to
such reserves via large-scale transportation infrastructure (primarily ocean
barge vessels).
The only licenses the Company has granted to the K-Fuel Technology are
to the KFP Project (Series "C"), K-Fuel LLC ("Series C"), and Heartland Fuels
Corporation ("HFC") (Series "A" and "B"). The Company owns 85 percent of the
common stock of HFC, and as a condition of the Kennecott Agreement, the Company
caused HFC to grant to K-Fuel LLC an exclusive sublicense to the Series "A" and
"B" Technologies.
In connection with the KFP Project, the Company and OVEC entered into
a Fuel Option Agreement (the "OVEC Fuel Option Agreement") in 1995 whereby, in
the event OVEC exercises its option to extend the Original Term of the FSA for
the full 120-month period of the Initial Extended Term, OVEC will have the right
to designate, and, if designated, the obligation to provide, at the Company's
expense, one or more sites suitable for the location of plants for the
processing of K-Fuel. Upon the Company's determination at the time of each such
designation that the plant will be commercially viable, the Company or an
affiliate thereof, and OVEC and/or Indiana Kentucky Corporation, a subsidiary of
AEP, shall promptly thereafter negotiate in good faith and enter into a purchase
agreement whereby OVEC will purchase the K-Fuel produced by any such plant built
by the Company on terms and conditions substantially similar to those in the
FSA. In the event the Company decides not to proceed with the construction of
such plant, the Company is obligated to grant OVEC a non-exclusive license for
the Series "C" Technology to enable OVEC to proceed with the development and
construction of such plant, and OVEC is required to pay the Company a royalty of
$0.65 per ton on any fuel produced at such plant. Additionally, the Company
entered into a Fuel Option Agreement with I&M dated August 17, 1995 (the "I&M
Fuel Option Agreement") which provides that under certain circumstances I&M
shall have the same rights as OVEC pursuant to the OVEC Fuel Option Agreement.
A predecessor entity of the Company acquired the Series "A" and "B"
Technologies from Edward Koppelman and other investors (the "Koppelman Group")
in 1984 by means of a cash payment of $10 million and a royalty agreement of $90
million. The royalty agreement was subsequently amended to provide that the
Company would pay Mr. Koppelman approximately $75.7 million, and Theodore
Venners, the Chief Executive Officer and a director of the Company, would pay
the Koppelman Group approximately $14.2 million. The royalty agreement with Mr.
Koppelman was amended in 1996 to make royalty payments to him from the Company
based on 25 percent of the Company's license fees and royalties. The royalties
due to Mr. Koppelman are to be computed after the royalties due to the State of
Wyoming ("State") as a result of a debt extinguishment agreement with the State
in 1994. Mr. Koppelman was advanced $500,000 of future royalties in 1996 in
exchange for amending the royalty agreement, which included a promissory note of
$200,000. The $500,000 advance reduces the total amount owed to Mr. Koppelman
under the royalty agreement to approximately $75.2 million. Also as part of the
royalty agreement, Mr. Koppelman has agreed to indemnify the Company and Mr.
Venners for any claims made by the Koppelman Group.
7
<PAGE>
The following table summarizes the Company's royalty obligations to
various third parties based on licensing and royalty revenues received by the
Company and the geographic source of the revenues:
<TABLE>
<CAPTION>
ROYALTY OBLIGATION UNITED STATES INTERNATIONAL EXPIRATION DATE OR
MAXIMUM AMOUNT
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Edward Koppelman 25 Percent 25 Percent Cumulative
/(1)/ royalties paid of
$75,222,000
State of Wyoming 12 Percent NA - None Cumulative
/(2)/ royalties paid of
$5,000,000 /(2)/
Fort Union Ltd. 20 Percent NA - None Earlier of
/(3)/ cumulative
royalties paid of
$1,500,000 or
September 15, 2015
Ohio Valley Electric 0.5 Percent NA - None None
/(4)/
</TABLE>
/(1)/ Computed after the State of Wyoming's royalty, and applies to both
license fees and royalties.
/(2)/ The royalty percentage decreases to 6 percent when a cumulative
sum of $5,000,000 has been paid. There is no expiration date or maximum
amount on the remaining 6 percent, and applies to both license fees and
royalties.
/(3)/ Applies to royalties only and is also applicable to any production
in Canada or Mexico.
/(4)/ Applies to royalties only and does not include the plant constructed
in 1996 by KFP or any future plants constructed under the OVEC Fuel Option
Agreement.
GOVERNMENT AND ENVIRONMENTAL REGULATION
In the United States, the K-Fuel product is not expected to be subject
to significant amounts of local, state or federal regulation with respect to its
transportation and distribution. However, any future United States production
plants will require numerous permits, approvals and certificates from
appropriate federal, state and local governmental agencies before construction
of each facility can begin, and will be subject to periodic maintenance and
review requirements once facilities begin production. Typically, most
permitting requirements are governed by state laws, but the United States
Environmental Protection Agency ("EPA") has the authority to overrule state
permitting decisions. The following types of permits are typically required for
commercial production facilities: (a) air quality, (b) wastewater discharge, (c)
land use, and (d) hazardous waste treatment, storage and disposal. KFP has in
place all permits for the operation of the KFP Project, and the Company expects
no difficulties in obtaining the necessary permits for the KFP II Project,
although no assurances can be given that such permits will be granted. The K-
Fuel Technology process generates only waste gas, waste discharge water, and a
small amount of fuel liquid as by-products of the process. The KFP Project has,
as will all future production facilities, waste gas and water treatment
facilities to properly treat and dispose of the waste by-products.
The Company currently has an operating permit in the name of KFX
Wyoming, issued by the Land Quality Division of the Wyoming Department of
Environmental Quality ("DEQ"), that encompasses all of the operating activities
of the KFP Project, the proposed KFP II Project, and the Company's mine property
adjacent to the KFP Project site (see "ITEM 2 - PROPERTIES"). The operating
permit issued by DEQ governs the current day-to-day operating activities of both
KFP and KFX Wyoming with respect to the permitted area, as well as the future
reclamation obligations to return the project site to its original condition.
Each year, the permit is reviewed by DEQ for compliance with specified operating
procedures and the appropriateness of the estimated future reclamation costs for
the project site. The 1997 annual permit review was submitted to DEQ in
December 1996 and is expected to be approved by DEQ no later than May 1997. The
total reclamation obligations of KFP, KFP II and KFX Wyoming are currently
8
<PAGE>
estimated at approximately $3,352,000, including certain contingency amounts
required under Wyoming law. Upon approval of the 1997 operating permit by DEQ,
KFX Wyoming and KFP will each be required to obtain reclamation bonds as
collateral to the DEQ for the estimated reclamation obligations. The
reclamation obligations of the KFP II Project will be assessed only if the KFP
II Project is constructed. The future reclamation obligation of KFX Wyoming as
submitted in the 1997 annual permit review is approximately $1,166,000. The
Company expects that there will be no significant reclamation requirements in
1997.
Future international K-Fuel production plants will also be subject to
various permitting and operational regulations specific to each country.
Generally, environmental permitting and operating regulations in the countries
the Company has targeted for international development (i.e., Indonesia, Turkey
and the Czech Republic) are not as stringent as those in the United States.
COMPETITION
To the Company's knowledge, there are currently no competitors
producing significant commercial quantities of beneficiated clean coal fuel
products either in the United States or in international markets. However,
there are other clean coal technology ("CCT") companies, primarily in the United
States, that are developing fuel combustion and product technologies that would
reduce emission pollutants and/or increase the heating value of coal feedstock
fuel sources. Many of these CCT competitors have greater financial, technical
and operational resources than the Company.
Carbontec Energy Corporation, a North Dakota corporation
("Carbontec"), had previously announced plans for an approximately 2 million TPY
coal beneficiation plant in the PRB to be operational in late 1996 or early
1997. To date, this project has not begun construction. The Carbontec technology
produces beneficiated coal that has a heating content of approximately 10,500 to
11,000 Btu per pound, as compared to K-Fuel produced from PRB coal that has a
heating content of approximately 11,500 to 12,500 Btu per pound.
ENCOAL, a joint venture of SGI International, Inc. and Ziegler Coal
Holdings, has a demonstration facility in the PRB that is currently capable of
producing approximately 100,000 TPY of Process Derived Fuel ("PDF"), a solid,
low-sulfur fuel product for use in utility boilers that has a heating content of
approximately 11,500 Btu per pound. ENCOAL has announced plans for a 6 million
TPY (coal feedstock quantity) coal beneficiation plant in the PRB, with
construction to begin by mid-1997, pending the successful permitting and
financing of the project. The ENCOAL process also produces a liquid fuel product
known as Coal Derived Liquid ("CDL").
Rosebud-Syncoal, a joint venture of Montana Power and an affiliate of
Northern States Power, has a demonstration facility at Montana Power's Rosebud
coal mine near Colstrip, Montana. The Syncoal facility is currently capable of
producing approximately 300,000 TPY of beneficiated coal that has a heating
content of approximately 11,800 Btu per pound.
In the United States market, the Company must also compete with other
naturally low-sulfur coals. Also, sulfur dioxide emission credits ("emission
credits") allow non-compliance users of higher sulfur coal to bundle coal
purchases with these emission credits to meet the CAAA requirements. Because of
an over-compliance situation that has developed in Phase I of the CAAA, there is
currently an abundant supply of emission credits in the U.S. market. However,
Phase II implementation of the CAAA beginning in January 2000 is expected to
result in a decreasing availability of emission credits. Additionally, existing
supplies of naturally low-sulfur coal are continually being depleted.
9
<PAGE>
The Company is not able to predict the impact that competing coal
beneficiation technologies, the availability and pricing of low-sulfur coal
reserves, or the availability and pricing of emission credits will have on the
future competitive position of the Company. The Company believes that its
current competitive advantage is its expectation of having the KFP Project
operational in 1997 to prove the K-Fuel Technology in the early stages of a
developing worldwide market that is expected to grow significantly in the
future.
RESEARCH AND DEVELOPMENT
In 1996 and 1995, the Company incurred approximately $1,198,000 and
$816,000, respectively, in research and development ("R&D") expenses (including
demonstration plant and laboratory operating expenses) to further refine and
develop the K-Fuel Technology process. Substantially all of the Company's R&D
expenses in 1996 and 1995 have been to test the design and operating
characteristics of planned production facilities (e.g., product loading and
handling requirements, storage and transportation characteristics, etc.). In
1997, the Company expects to decrease its R&D expenses because of its
relationship with K-Fuel LLC and that entity's planned R&D activities. The
Company will continue to operate its Gillette, Wyoming demonstration facility in
1997 in a supporting role to K-Fuel LLC and KFP. See "ITEM 2 - PROPERTIES."
EMPLOYEES
The Company currently has 17 full-time employees who work in the areas
of marketing, finance and administration, and research and development. The
Company considers its relations with all employees to be excellent.
10
<PAGE>
ITEM 2. PROPERTIES
For its principal executive offices, the Company has leased
approximately 5,900 square feet of office space for a period of five years
ending September 30, 2000 located at 1999 Broadway, Suite 3200, Denver, Colorado
80202. The base rent under the lease is $6,783 per month; the Company is also
obligated to pay, as additional rent, allocable operating costs. The Company has
a right of refusal on additional adjacent office space, and has the option to
renew the lease for one additional five-year term.
The Company has leased approximately 2,500 square feet of office space
for a period of five years ending June 30, 1998 located at 901 North Stuart
Street, Suite 750, Arlington, Virginia 22203. The base rent under the lease is
approximately $4,452 per month, with escalations of 3 percent for each
subsequent year of the lease term. The Company is also obligated to pay, as
additional rent, allocable operating costs. The Company has the option to renew
the lease for one additional five-year term.
The Company, through its KFX Technology, Inc. ("KFXT") subsidiary,
owns a demonstration plant and leases from KFP (on a rent-free basis) a research
and development laboratory adjacent to the KFP Project (the "Gillette
Facility"). The Gillette Facility is located on approximately 80 acres of land,
inside the rail loop of Fort Union Mine, in Campbell County, Wyoming,
approximately 5 miles northeast of Gillette, Wyoming. The Gillette Facility is
comprised of three buildings totaling approximately 7,100 square feet.
In 1995, the Company acquired the Fort Union Mine ("Pit 1"), which
consists of approximately 1,002 acres of surface and coal lands located
northeast of Gillette, Campbell County, Wyoming, and a coal loadout facility
located on a railroad loop connecting to the Burlington Northern Railroad.
Recoverable coal lying within Pit 1 is approximately 1.3 million tons. In 1997,
the Company intends to transfer ownership of approximately 348 acres of surface
land to KFP.
ITEM 3. LEGAL PROCEEDINGS
In November 1995, the Company filed a lawsuit against Fru-Con
Construction Corporation and Fru-Con Engineering, Inc. (collectively, "Fru-Con")
in the Wyoming State Court, 6th Judicial District. The action has been removed
to the United States District Court for the District of Wyoming. The Company's
lawsuit requests that the court enter a judgement that Fru-Con has no interest
or claim in or against the Company or any of the Company's property or
interests, or that Fru-Con is barred from such claims. Fru-Con had asserted
claims for approximately $1.8 million for engineering services and an interest
in K-Fuel plants built in North America by virtue of contractual arrangements
with a limited partnership sponsored by corporations in which a predecessor
entity to the Company had a partnership interest. Because the work done by Fru-
Con was for a limited partnership in which the Company's predecessor entity was
not a partner, and because payment for the work performed by Fru-Con was
contingent upon successful project financing which never materialized, as well
as for other legal and factual reasons, the Company believes that Fru-Con has no
valid rights or claims against the Company. Accordingly, the Company believes
that the ultimate resolution of this action will not have a material adverse
impact on the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders
during the fourth quarter of 1996.
11
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Beginning January 30, 1996, the Company's common stock was traded on
the American Stock Exchange (under the trading symbol "KFX"). During the year
ended December 31, 1995 and from January 1 to January 29, 1996, the common stock
traded on the NASDAQ SmallCap Market (under the trading symbol "KFXI"). The
following table presents the reported high and low bid prices for the common
stock on the NASDAQ Small Cap Market and the reported sales prices on the
American Stock Exchange for the two-year period ended December 31, 1996. With
respect to NASDAQ SmallCap Market prices, the bid prices reflect interdealer
quotations, without retail markup, markdown or commission, and do not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
YEAR PERIOD HIGH LOW
- -----------------------------------------
<S> <C> <C> <C>
1996 First Quarter $5 11/16 $3 7/8
Second Quarter 8 1/2 5 1/8
Third Quarter 7 1/2 5 1/2
Fourth Quarter 7 7/16 4 7/8
1995 First Quarter 5 1/4 4 1/2
Second Quarter 5 1/4 3 5/8
Third Quarter 6 1/4 3 5/8
Fourth Quarter 5 5/8 4 1/8
</TABLE>
As of March 24, 1997, the Company had 237 holders of record of its
common stock. This does not include holdings in street or nominee names. On
March 24, 1997, the closing price of the Company's common stock on the American
Stock Exchange was $4.75 per share.
The Company has never paid cash dividends and does not anticipate
paying dividends in the foreseeable future. In addition, pursuant to the Stock
Purchase Agreement, so long as TCK, together with its affiliates, own at least
1,000,000 shares of the Company's common stock and either of the warrants issued
to TCK remain in effect, the Company may not declare or pay any dividends on its
common stock other than dividends payable solely in the Company's common stock.
See "ITEM 1 - BUSINESS - Strategic Relationships - Thermo Ecotek Corporation."
-------------------------
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------------------------------------------------------------
STATEMENT OF OPERATIONS
DATA FOR THE YEAR
ENDED DECEMBER 31:
<S> <C> <C> <C> <C> <C>
Total revenues and
other income .................. $ 1,767,567 $ 379,322 $ 452,775 $ 2,239,730 $ 1,115,209
Interest and other income ....... 171,269 124,959 88,188 544,565 1,061,476
Loss before income taxes
and extraordinary item ........ (5,628,541) (8,795,929) (6,119,677) (3,528,698) (2,839,883)
Net income (loss) ............... (5,628,541) (6,228,720) 2,349,126 (3,528,698) (2,839,883)
Net income (loss) per share...... (.25) (.33) .14 (.23) (.29)
Average shares
outstanding ................... 22,458,000 18,578,000 16,621,000 15,472,000 9,786,000
BALANCE SHEET DATA
AT DECEMBER 31:
Current assets .................. $ 1,957,005 $ 4,680,784 $ 449,895 $ 5,736,853 $ 5,208,546
Working capital (deficit) ....... (166,521) 2,253,682 (6,940,882) (14,863,745) (13,261,072)
Total assets .................... 14,923,567 18,611,493 11,630,896 18,009,849 18,125,865
Long-term debt .................. 1,110,000 1,399,851 650,000 280,000 280,000
Stockholders' equity (deficit)... 10,524,041 13,752,528 3,590,119 (2,870,749) (623,753)
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This 10-K filing contains, in addition to historical information,
forward-looking statements that include risks and uncertainties. The Company's
actual results may differ materially from those anticipated in these forward-
looking statements. Factors that might cause such a difference include those
discussed below, as well as general economic and business conditions, regulatory
changes, competition, the acceptance of new product offerings and other factors
discussed elsewhere in this 10-K. The Company undertakes no obligation to
release publicly any revisions to these forward-looking statements that may be
made to reflect events or circumstances after the date hereof or to reflect the
occurrence of anticipated or unanticipated events.
OVERVIEW
Excluding the joint venture fee of $1 million in 1996, to date the
Company has not generated any other material revenues from the licensing of the
K-Fuel Technology to third party licensees or the direct manufacturing of K-Fuel
product. All revenues other than the joint venture fee in 1996 have been
derived from ancillary sources not directly related to the Company's efforts to
commercialize the K-Fuel Technology. Net losses before extraordinary items and
income taxes were approximately $6.1 million, $8.8 million and $5.6 million in
1994, 1995 and 1996, respectively. The KFP Project is the only commercial-
scale K-Fuel production facility constructed to date. Until the Company
successfully negotiates additional third-party licensing and royalty agreements
and / or independently constructs and operates additional commercial-scale
production facilities, net operating losses will continue. The royalties and
profit interests to be derived from the Company's 5 percent ownership interest
in the KFP Project will not be sufficient to meet all of the operating and debt
service needs of the Company based on current and future anticipated operating
plans and budgets. Until such time as the Company has in place sufficient
additional commercial-scale production facilities (either owned independently or
through joint venture entities similar to the KFP Project) to generate positive
cash flow from operations, the Company will be dependent on additional debt
and/or equity financing. The Company expects that most or all of its financing
needs in 1997 with respect to day-to-day operations and debt service
requirements will be provided by the January 1997 equity funding provided by
TCK, certain technical subcontract revenues from K-Fuel LLC, and the Company's
interest in profits and production royalties from the KFP Project.
Additionally, any equity participation that the Company negotiates for future
commercial-scale production facilities prior to January 2000 (or later,
depending on whether TCK exercises Warrant "A") will have to be financed by
sources other than the Stock Purchase Agreement with TCK. See "ITEM 1 -
BUSINESS - Strategic Relationships - Thermo Ecotek Corporation."
-------------------------
RESULTS OF OPERATIONS
Year Ended December 31, 1996 vs. Year Ended December 31, 1995
- -------------------------------------------------------------
The Company had a net loss before income tax benefits and
extraordinary item of approximately $5,629,000 in 1996 as compared to a loss of
approximately $8,796,000 in 1995. The decreased loss of approximately
$3,167,000 is attributable to a revenue increase of approximately $1,388,000 in
1996 over 1995, and a decrease in expenses of approximately $1,779,000 in 1996
as compared to 1995. In 1996, the Company had no debt extinguishment gains and
related income tax benefits, as compared to such gains in 1995 totaling
approximately $2,567,000. Including such gains in 1995, overall net loss
decreased from approximately $6,229,000 in 1995 to approximately $5,629,000 in
1996.
Revenues increased in 1996 because of the one-time joint venture fee
of $1,000,000, as well as approximately $360,000 in technical subcontract work
the Company performed for K-Fuel LLC beginning in mid-1996. As the K-Fuel LLC
joint venture commenced in 1996, there were no comparable figures
14
<PAGE>
in 1995. The Company does not expect to receive any further fees related to K-
Fuel LLC until one or more Commercial Projects are constructed by K-Fuel LLC;
see "ITEM 1- BUSINESS - Strategic Relationships - Kennecott Energy and Coal
-------------------------
Company." The Company will perform additional technical subcontract work for K-
- -------
Fuel LLC in 1997, although the dollar amount of such work is not currently
determinable. All of K-Fuel LLC's research and development costs, including any
technical subcontract work performed for K-Fuel LLC by the Company, are paid by
KAFI.
Expenses decreased by approximately $1,779,000 in 1996 as compared to
1995. The components of the overall decrease (increase) in expenses in 1996 are
summarized as follows (all figures are approximate):
<TABLE>
<S> <C>
Decrease in marketing, general and administrative expenses ........... $ 813,000
One-time litigation charge and performance fee in 1995 ............... 1,760,000
Decrease in interest expense.......................................... 493,000
Increase in depreciation and amortization expense..................... (204,000)
Increase in research & development / laboratory operating expenses ... (382,000)
Write-down of mine property and reclamation costs incurred in 1996.... (701,000)
----------
Net decrease in expenses.......................................... $1,779,000
==========
</TABLE>
Marketing, general and administrative expenses decreased by
approximately $813,000 in 1996 as compared to 1995 primarily as a result of (1)
an overall decrease in professional services fees in 1996 of approximately
$859,000 and (2) a decrease in board of director compensation expense in 1996 of
approximately $178,000, partially offset by (3) the Company's 51 percent equity
in the expenses of K-Fuel LLC (other than research and development and
amortization expenses) in 1996 totaling approximately $87,000 and (4) an overall
increase in payroll and general administrative expenses in 1996 totaling
approximately $137,000.
The decrease in professional services fees in 1996 is generally
attributable to certain stock-based compensation agreements incurred only in
1995 relating to certain marketing and public relations activities. However,
legal fees increased by approximately $177,000 in 1996 to a total of
approximately $693,000, of which approximately $340,000 was specifically
attributable to the K-Fuel LLC joint venture agreement in 1996 and for which no
further significant legal expense is expected in 1997. The decrease in board of
director compensation in 1996 is attributable to a change of compensation policy
beginning in 1996. The Company's 51 percent equity in the marketing, general
and administrative expenses of K-Fuel LLC will continue in 1997 but will
increase over the 1996 amount because of the full year in 1997 as compared to
the partial year in 1996. The increase in payroll and general and
administrative expenses in 1996 is attributable to the hiring of two executive
employees in 1996 and the Company doubling its Denver, Colorado headquarters
office space in the fourth quarter 1995.
The litigation settlement ($800,000) and success fees relating to the
closing of the KFP Project ($960,000) were one-time expenses incurred in 1995
only.
The decrease in interest expense in 1996 is attributable to the
significant decrease in outstanding debt in 1996 as compared to 1995. Total
debt outstanding has decreased to $1,225,000 at December 31, 1996 from
approximately $1,614,000 at December 31, 1995, and from approximately $4,835,000
at December 31, 1994.
The increase in depreciation and amortization expense in 1996 is
attributable to the full year of amortization of the Series "C" patents acquired
in the third quarter of 1995 and the depreciation of certain property and
equipment additions in 1996 at the Company's demonstration and laboratory
facility.
15
<PAGE>
The increase in research and development and laboratory operating
expenses in 1996 is attributable to the K-Fuel LLC technical subcontract
services performed in 1996 only. The Company will continue to perform such
services for K-Fuel LLC in 1997, although the amount and scope of such work is
not currently determinable.
The write-down of mine property and reclamation costs incurred in 1996
are attributable to the Company's mining property near Gillette, Wyoming. This
property was acquired by the Company in 1995 and was related to its
participation in the KFP Project. The Company had intended to sell this
property. However, in 1996 the Company determined that it would not sell the
property; rather it intends to hold the mining property as a reserve coal supply
for the KFP Project to protect against any raw coal feedstock disruptions that
might result from the current consolidation that is happening among coal
producers in the Powder River Basin Also in 1996, the Company reassessed the
value of this asset and wrote-down the value of the property to its current
estimated value. Additionally, the Company increased its reclamation reserve
related to the property by approximately $134,000 in 1996 because of more
accurate reclamation studies performed in 1996 and certain regulatory changes
enacted by the State of Wyoming. The Company does not expect to incur any
significant cash reclamation costs related to the property in 1997.
Year Ended December 31, 1995 vs. Year Ended December 31, 1994
- -------------------------------------------------------------
The Company had a net loss before income tax benefits and
extraordinary item of approximately $8,796,000 in 1995 as compared to a net loss
of approximately $6,120,000 in 1994. The increased loss of approximately
$2,676,000 is primarily attributable to increased marketing, general and
administrative expenses of approximately $734,000, performance fees of $960,000
specifically associated with the TCK Stock Purchase Agreement and KFP Project
funding by TCK, and a litigation charge of $800,000. The increased marketing,
general and administrative expenses in 1995 were primarily comprised of an
increase in legal and other professional fees of approximately $324,000
resulting from the TCK Stock Purchase Agreement and KFP Project construction
start-up, approximately $238,000 in increased investor and public relations
expenses, and other expense increases totaling approximately $172,000 primarily
relating to additional employees hired in 1995.
Depreciation and amortization expenses increased by approximately
$251,000 in 1995 because of a full year of amortization of a prepaid consulting
agreement in 1995 as compared to a partial year in 1994, and the acquisition of
the Series "C" patents in August 1995.
Research and development expenses decreased by approximately $298,000
in 1995 because of specific activities and projects undertaken in 1994 only.
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased from approximately $2,254,000 at December
31, 1995 to a working capital deficit of approximately $167,000 at December 31,
1996. The decrease is primarily attributable to a December 1995 investment by
TCK under the Stock Purchase Agreement for $3 million. In January 1997, TCK
invested another $2.5 million in the Company. On a proforma basis, after
including the January 1997 investment in the Company by TCK, proforma working
capital at December 31, 1996 was approximately $2,333,000, comparable to the
working capital at December 31, 1995.
16
<PAGE>
The Company expects no additional stock purchases by TCK in 1997, 1998
or 1999. Under the terms of the TCK Stock Purchase Agreement, the next possible
investment by TCK is not until a period of time beginning in January 2000 and
expiring in July 2001. There are no assurances that TCK will make any
investments in the Company at that time. Additionally, the TCK Stock Purchase
Agreement prohibits the Company from issuing additional shares of common stock
to other investors unless at least 90 percent of the proceeds from such stock
issuances are used to invest in K-Fuel production facilities. Furthermore, in
the event of any stock issuances by the Company, TCK's Warrant "A" may be
subject to certain adjustments that increase the number of shares available to
TCK under Warrant "A." See "ITEM 1 - BUSINESS - Strategic Relationships --
Thermo Ecotek Corporation."
- -------------------------
Because of the Company's current net operating loss carryforward
position with respect to federal income taxes, the Section 29 credit the Company
receives from its 5 percent ownership of KFP will likely not be utilized in the
near term (i.e., next two to three years). Accordingly, the Company is
currently considering the sale of a portion of its ownership interest in KFP as
a means to generate cash. There are no assurances that the Company will be able
to successfully complete such a sale transaction.
KFP is also currently considering the construction of a fifth
processing vessel for the KFP Project, which would add production capacity of
approximately 125,000 TPY. The funding for this expansion, if commenced, would
be funded 100 percent by TCK or other entities with which TCK and the Company
are currently negotiating. The Company may be entitled to certain license fees
and an ownership percentage in the fifth processor expansion, the terms of which
have not yet been finalized. There are no assurances that such an expansion
will be completed by KFP.
The Company is also working to commence construction of the KFP II
Project. There are no assurances that the Company will obtain the necessary
permits for the KFP II Project or that suitable financing terms will be
negotiated with potential partners. If the KFP II Project is not constructed,
it is unlikely that any other U.S. K-Fuel production facilities will be
constructed until K-Fuel LLC successfully develops an enhanced processing vessel
design and completes the remaining objectives of the research and development
program. There are no assurances that such objectives of K-Fuel LLC will be
achieved.
The Company's current cash balances, the expected revenues to be
derived from the Company's research and development subcontract agreements with
K-Fuel LLC, and the royalty income to be derived from the commencement of
operations of KFP in 1997 are expected to fund the Company's operations and debt
service requirements until the first quarter of 1998 based on current operating
plans and budgets. The Company does not expect to realize any significant net
revenues from its 5 percent ownership interest in KFP during 1997. The Company
will need to realize additional operating funding sources and reduce certain
operating expenses to sustain operations into 1998 and beyond. Such potential
sources of funding may include, but are not limited to (1) the proposed sale of
all or a portion of the Company's 5 percent interest in KFP; (2) certain
development and license fees that may be derived from a potential 125,000 TPY
expansion of the KFP Project; (3) license fees to be derived from the proposed
construction of an Indonesia K-Fuel production facility in late 1997 or early
1998; and (4) certain development and license fees to be derived from the
proposed commencement of construction of the 635,000 TPY KFP II Project. There
are no assurances that any of these potential funding sources will materialize,
and the Company does not currently have any commitments with respect to any such
funding sources. If such events do not materialize, the Company may be forced
to seek debt and / or equity financing on terms and conditions that may not be
favorable to the Company, if available at all. The Company does not currently
have any commitments with respect to any debt or equity financing.
17
<PAGE>
As discussed at "ITEM 1 - BUSINESS - Current Projects - KFX Fuel
--------
Partners," a fire at the KFP facility in December 1996 destroyed one of two oil
- --------
heating systems for the KFP facility. Until the fire damage is fully repaired
and the KFP facility is operating at its full capacity, the Company may
experience difficulty in attracting other investors to the KFP II Project, the
expansion of the KFP Project, or negotiating suitable terms with investors with
respect to the sale of all or a portion of the Company's ownership interest in
KFP. The Company expects that the fire damage will be fully repaired and the
KFP facility will be fully operational in the second or third quarter of 1997.
The Company also anticipates that it will be required to fund a capital call in
the second quarter of 1997 relating to certain cost overruns on the construction
of the KFP project. The amount of the capital call is expected to be
approximately $410,000, reduced by a receivable the Company has from KFP in the
amount of approximately $260,000. The net amount of the capital call, or
approximately $150,000, will be funded by the Company from available cash or a
short-term promissory note with KFP. This capital call does not include any
uninsured losses resulting from the December 1996 fire. Presently, the Company
does not expect that KFP will have any significant uninsured losses. There are
no assurances that additional capital calls will not be required to be funded by
the Company in 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The consolidated financial statements and notes thereto included in
this item are indexed on page F-1 "Index to Consolidated Financial Statements."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
There were no changes in or significant disagreements with the
Company's independent accountants in 1996.
18
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by items 10 through 13 is set forth under the
captions "Election of Directors," "Executive Officers," "Executive
Compensation," "Stock Ownership," and "Related Party Transactions" in the
Company's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of
1934, as amended, not later than 120 days after the close of the Company's
fiscal year on December 31, 1996, and is incorporated by reference as if set
forth in full.
19
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(1) EXHIBITS LIST
The following exhibits are filed herewith or are incorporated by
reference to exhibits previously filed with the Securities and Exchange
Commission. The Company shall furnish copies of exhibits for a reasonable fee
(covering the expense of furnishing copies) upon written request.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NUMBER
- -----------------------------------------------------------------------------------
<S> <C> <C>
3.1 /(1)/ Restated Certificate of Incorporation
of the Company -
3.2 /(1)/ Certificate of Amendment to
Certificate of Incorporation of
the Company -
3.3 /(1)/ Amended and Restated Bylaws of the
Company -
3.4 /(5)/ Second Amended and Restated Bylaws of -
the Company -
4.1 /(5)/ Sample Common Stock Certificate
10.1 /(1)/ Amendments to Agreements between
Theodore Venners,
S.A. Wilson, Koppelman Fuel
Development Company, and
the Koppelman Group dated December
29, 1992 -
10.2 /(1)/ Assignment of U.S. Patents by K-Fuel
Limited Partnership to the
Company dated July 23, 1993 -
10.3 /(1)/ Assignment of U.S. Trademark
Registration by K-Fuel Limited
Partnership to the Company dated July
23, 1993 -
10.4 /(1)/ Royalty Agreement dated December 29,
1992 between the Company
and the Koppelman Group -
10.5 /(1)/ Agreement dated December 19, 1991
among K-Fuel Partnership,
Edward Koppelman, K-Fuel Limited
Partnership and KSA Inc. -
10.6 /(1)/ Atlantic Partners License dated April
15, 1992 between K-Fuel
Limited Partnership and Atlantic
Partners -
10.7 /(1)/ Lease Agreement dated June 24, 1993
between Equitable Life
Assurance Society of the United
States and the Company -
10.8 /(5)/ Fourth Amendment to Office Lease
dated August 17, 1995 between
1999 Broadway Partnership and the
Company -
10.9 /(1)/ Restricted Stock Plan for Directors
and Selected Officers dated
December 16, 1993 -
10.10 /(4)/ Restricted Stock Plan for Selected
Independent Contractors dated
February 16, 1994 -
10.11 /(1)/ Stock Option Plan dated December 16,
1993 -
10.12 /(1)/ Settlement Agreement dated December
14, 1992 -
10.13 /(1)/ Stock Exchange Agreement Dated
December 14, 1992 -
10.14 /(1)/ Stipulation and Agreement dated
February 28, 1994 between Energy
Brothers Technology, Inc., State of
Wyoming, the Company,
Theodore Venners, Edward Koppelman
and Energy Brothers Holding, Inc. -
10.15 /(1)/ Purchase and Sale Agreement dated
June 1, 1994 between the
Company and Warimpex Finanz -
10.16 /(4)/ Internal Revenue Service Private
Letter ruling dated March 20, 1995 -
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NUMBER
- --------------------------------------------------------------------------------
<S> <C> <C>
10.17 /(4)/ Extension of Stock Forfeiture Agreement -
between Theodore Venners and Rudolph G.
Swenson; Joyce M. Goldman; David Bretzlauf;
Joseph M. Butler; R.C. Whitner; Hillari
Koppelman; Thomas D. Smart and Susan M.
Thevenet; Charles F. Vance
10.18 /(2)/ Stock Purchase Agreement dated August 18, -
1995 between the Company and Thermo Ecotek
Corporation
10.19 /(2)/ Stock Purchase Warrants dated August 18, -
1995 between the Company and Thermo Ecotek
Corporation
10.20 /(2)/ Stockholders' Voting and Co-Sale Agreement -
dated August 18, 1995 among the Company,
Thermo Ecotek Corporation and Theodore Venners.
10.21 /(2)/ Registration Rights Agreement dated August 18, -
1995 between the Company and
Thermo Ecotek Corporation
10.22 /(3)/ Common Stock Purchase Agreement dated July 27, -
1995 between the Company and David H. Russell
10.23 /(3)/ Agreement dated August 18, 1995 between the -
Company and ENSERV, Inc., as amended
10.24 /(3)/ Limited Partnership Agreement of KFX Fuel -
Partners, L.P. dated August 18, 1995
10.25 /(3)/ Letter Agreement dated August 18, 1995 between -
Eco Fuels, Inc. and KFX Wyoming, Inc.
regarding the Management, Operations
and Maintenance Agreement
10.26 /(3)/ KFX Purchase and Sale Agreement dated August -
18, 1995 by and among Marigold Land Company,
Fort Union Ltd. And the Company
10.27 /(3)/ Gross Royalty Share Agreement dated August 17, -
1995 between the Company and Fort Union, Ltd.
10.28 /(3)/ Indemnity Agreement dated August 18, 1995 -
between the Company and Thermo Ecotek Corporation
10.29 /(3)/ Letter of Agreement dated August 15, 1995 -
between the Company and Edward Koppelman
10.30 /(3)/ Assignment dated August 29, 1995 executed by -
Edward Koppelman in favor of the Company
10.31 /(3)/ Promissory Note dated August 25, 1995 executed -
by the Company in favor of Edward Koppelman
10.32 /(3)/ Patent and Technology License dated August 17, -
1995 between Edward Koppelman and KFX
Fuel Partners, L.P.
10.33 /(3)/ Notice of Termination dated August 16, 1995 -
between Edward Koppelman and Energy
Brothers Holding, Inc.
10.34 /(5)/ Letter Agreement dated February 28, 1995 -
between RCD Development and the Company
10.35 /(6)/ Limited Liability Company Agreement of K-Fuel, -
L.L.C. dated April 19, 1996
10.36 /(6)/ Pledge Agreement executed by Theodore Venners -
in favor of Kennecott Energy and Coal
Company dated April 19, 1996
10.37 /(6)/ Letter Agreement between Theodore Venners and -
Kennecott Energy and Coal Company dated
April 22, 1996
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NUMBER
- -------------------------------------------------------------------------------
<S> <C> <C>
10.38 /(6)/ Amended and Restated Heartland -
License Agreement between Heartland
Fuels Corporation and the Company
dated April 19, 1996
10.39 /(7)/ Royalty Amendment Agreement dated June 3, 1996 -
between the Company, Edward Koppelman and
Theodore Venners
10.40 /(7)/ Promissory Note to Edward Koppelman dated June -
3, 1996
10.41 /(*)/ Design-Build Agreement between the Company and
Yanke Energy dated December 30, 1996 -
10.42 /(*)/ Amendment to Agreement between the Company and
RCD Development dated January 16, 1997 -
21.1 /(*)/ Subsidiaries 24
23.1 /(*)/ Consent of Independent Accountants 25
Accountants
27.1 /(*)/ Financial Data Schedule -
- ---------------------
/(*)/ Filed herewith.
/(1)/ Document previously filed with the U.S. Securities and Exchange
Commission on March 1, 1994 as an exhibit to the Company's Form
10-SB and incorporated herein by reference.
/(2)/ Document previously filed with the U.S. Securities and Exchange
Commission with the Company's Current Report on Form 8-K dated
August 18, 1995 and incorporated herein by reference.
/(3)/ Document previously filed with the U.S. Securities and Exchange
Commission with the Company's Registration Statement on Form SB-2
(File No. 33-97418) and incorporated herein by reference.
/(4)/ Document previously filed with the U.S. Securities and Exchange
Commission with the Company's Registration Statement on Form SB-2
(File No. 33-90128) and incorporated herein by reference.
/(5)/ Document previously filed with the U.S. Securities and Exchange
Commission with the Company's Annual Report on Form 10-KSB, as
amended, for the year ended December 31, 1995 and incorporated
herein by reference.
/(6)/ Document previously filed with the U.S. Securities and Exchange
Commission with the Company's Current Report on Form 8-K dated
April 19, 1996 and incorporated herein by reference.
/(7)/ Document previously filed with the U.S. Securities and Exchange
Commission with the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996 and incorporated herein by
reference.
(2) FINANCIAL STATEMENT SCHEDULES
NA - None.
(3) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Registrant during the quarter ended
December 31, 1996.
</TABLE>
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
KFX INC.
<TABLE>
<CAPTION>
Date: March 24, 1997 By: /s/ Theodore Venners
-------------------------------------
<S> <C> <C>
Theodore Venners
Chairman of the Board of Directors
President and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
Date: March 24, 1997 By: /s/ R. David Usilton
-------------------------------------------
R. David Usilton
Chief Operating Officer
Date: March 24, 1997 By: /s/ Kurt B. Eckrich
-------------------------------------------
Kurt B. Eckrich
Chief Financial Officer and Director
Date: March 24, 1997 By: /s/ Rudolph G. Swenson
-------------------------------------------
Rudolph G. Swenson
Secretary and Treasurer
Date: March 24, 1997 By: /s/ Jeffrey A. Hansen
-------------------------------------------
Jeffrey A. Hansen
Controller and Principal Accounting Officer
Date: March 24, 1997 By: /s/ Vincent N. Cook
-------------------------------------------
Vincent N. Cook
Director
Date: March 24, 1997 By: /s/ Brian D. Holt
-------------------------------------------
Brian D. Holt
Director
Date: March 24, 1997 By: /s/ Peter G. Martin
-------------------------------------------
Peter G. Martin
Director
Date: March 24, 1997 By: /s/ Jack C. Pester
-------------------------------------------
Jack C. Pester
Director
Date: March 24, 1997 By: /s/ Starkey A. Wilson
-------------------------------------------
Starkey A. Wilson
Director
</TABLE>
<PAGE>
SUBSIDIARIES - EXHIBIT 21.1
<TABLE>
<CAPTION>
ADDRESS OF
PRINCIPAL STATE OF
PLACE OF INCORPORATION PERCENTAGE
SUBSIDIARY BUSINESS OR ORGANIZATION OWNERSHIP
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
KFX Technology, Inc. 3574 Garner Wyoming 99.8 %
Lake Road
Gillette,
Wyoming 82716
KFX Wyoming, Inc. 1999 Broadway Wyoming 100.0 %
Suite 3200
Denver, CO
80202
Atlantic Partners L.L.C. 1999 Broadway Colorado 83.0 %
/(*)/ Suite 3200
Denver, CO
80202
Heartland Fuels 1999 Broadway Wisconsin 85.0 %
Corporation /(*)/ Suite 3200
Denver, CO
80202
K-Fuel L.L.C. 1999 Broadway Delaware 51.0 %
Suite 3200
Denver, CO
80202
KFX Fuel Partners II, L.P. 1999 Broadway Delaware 100.0 %
/(*)/ Suite 3200
Denver, CO
80202
KFX Bohemia, s.r.o./ (*)/ 1999 Broadway Czech Republic 100.0 %
Suite 3200
Denver, CO
80202
KSA Partnership /(*)/ 1999 Broadway Delaware 67.0 %
Suite 3200
Denver, CO
80202
</TABLE>
/(*)/ Entity is substantially inactive with no significant assets or revenues.
TRADE NAMES
- -----------
KFX Inc. does business under the following trade names at its offices at 901
North Stuart Street, Suite 750, Arlington, Virginia 22203:
KFX / Atlantic Partners
KFX International
24
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS - EXHIBIT 23.1
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-4298) and
the Registration Statement on Form S-8 (No. 333-9873) of KFX Inc. of our report
dated March 25, 1997 appearing on page F-2 of this Form 10-K.
PRICE WATERHOUSE LLP
Denver, Colorado
March 26, 1997
25
<PAGE>
KFX INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants...................... F-2
Consolidated Balance Sheets............................ F-3
Consolidated Statements of Operations.................. F-4
Consolidated Statements ofStockholders' Equity......... F-5
Consolidated Statements of Cash Flows.................. F-6 to F-7
Notes to Consolidated Financial Statements............. F-8 to F-24
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of KFX Inc:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
KFX Inc. and its subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Denver, Colorado
March 19, 1997
F-2
<PAGE>
KFX INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
--------------------------
ASSETS
------
<S> <C> <C>
Current:
Cash and cash equivalents............. $ 1,403,625 $ 2,870,039
Reclamation deposit................... - 1,503,032
Accounts receivable................... 447,230 26,002
Prepaid expenses...................... 106,150 281,711
----------- -----------
Total current assets................ 1,957,005 4,680,784
----------- -----------
Property, plant and equipment, net of
accumulated depreciation................ 5,458,801 6,651,558
Patents, net of accumulated
amortization............................ 3,662,894 4,273,583
Investment in KFX Fuel Partners,
L.P..................................... 2,792,304 2,792,304
Investment in K-Fuel,
L.L.C................................... 157,180 -
Prepaid royalty........................... 500,000 -
Other assets.............................. 395,383 213,264
----------- -----------
$14,923,567 $18,611,493
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current:
Accounts payable........................ $ 1,041,800 $ 836,538
Accrued expenses........................ 166,651 698,765
Due to related parties.................. 707,756 585,814
Interest payable........................ 92,319 91,985
Current maturities of long-term debt.... 115,000 214,000
----------- -----------
Total current liabilities........... 2,123,526 2,427,102
----------- -----------
Long-term debt, less current maturities... 1,110,000 1,399,851
Mine reclamation liability................ 1,166,000 1,032,012
----------- -----------
Total liabilities................... 4,399,526 4,858,965
----------- -----------
Commitments and contingencies (Notes 2,
4, 5, 7, 13 and 14)
Stockholders' equity:
Preferred stock, $.001 par value,
20,000,000 shares authorized;
none issued........................... - -
Common stock, $.001 par value,-
80,000,000 shares authorized;
22,676,040 and 22,159,374 shares
issued and outstanding................ 22,676 22,159
Additional paid-in capital.............. 44,693,093 42,293,556
Accumulated deficit..................... (34,191,728) (28,563,187)
----------- -----------
Total stockholders' equity........ 10,524,041 13,752,528
----------- -----------
$14,923,567 $18,611,493
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
KFX INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
Joint venture fee.........................$ 1,000,000 $ - -
Contract revenue.......................... 596,298 254,363 364,587
Interest and other income................. 171,269 124,959 88,188
----------- ----------- -----------
Total revenue and other income........... 1,767,567 379,322 452,775
----------- ----------- -----------
Marketing, general and administrative
expenses................................ 3,451,146 4,264,034 3,530,264
Performance fees related to investment
in KFX Fuel Partners, L.P................ - 960,000 -
Litigation settlement..................... - 800,000 -
Research and development.................. 465,166 444,329 741,650
Demonstration plant and laboratory
operations................................ 733,268 371,921 318,237
Write-down of mine property and
reclamation costs....................... 700,500 - -
Depreciation and amortization............. 1,861,164 1,657,385 1,406,455
Interest expense.......................... 184,864 677,582 575,846
----------- ----------- -----------
Total expenses........................... 7,396,108 9,175,251 6,572,452
----------- ----------- ----------
Loss before income taxes and
extraordinary item....................... (5,628,541) (8,795,929) (6,119,677)
Income tax benefit........................ - 872,851 2,879,393
----------- ----------- ----------
Loss before extraordinary item............ (5,628,541) (7,923,078) (3,240,284)
Extraordinary item:
Gain from debt extinguishment, net of
income taxes of $872,851 and $2,879,393,
respectively........................... - 1,694,358 5,589,410
----------- ----------- ----------
Net income (loss)........................$ (5,628,541) $(6,228,720) $ 2,349,126
=========== =========== ==========
Net income (loss) per common share:
Before income taxes and extraordinary
item.....................................$ (.25) $ (.47) $ (.37)
Income tax benefit and extraordinary
item..................................... - .14 .51
------------ ----------- ----------
Net income (loss).........................$ (.25) $ (.33) $ .14
============ =========== ===========
Weighted average common shares
outstanding:
For loss before income taxes and......... 22,458,000 18,578,000 16,425,000
extraordinary item ......................=========== =========== ===========
For net income (loss).................... 22,458,000 18,578,000 16,621,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
KFX INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
---------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993................ 15,755,980 $15,756 $21,797,088 $(24,683,593)
Stock issued for cash..................... 631,300 631 1,932,396
Stock issued for services................. 151,912 152 697,563
Stock issued for partnership interest
and consulting services................ 250,000 250 1,124,750
Discount on issuance of promissory
notes converted to common stock........ - - 356,000
Net income................................ - - - 2,349,126
---------- ------- ----------- -------------
Balance, December 31, 1994................ 16,789,192 16,789 25,907,797 (22,334,467)
Stock issued for cash..................... 4,377,365 4,377 10,092,498
Stock issued for promissory notes
and accrued interest payable........... 374,727 375 1,580,348
Stock issued for services and board
of director fees....................... 233,090 233 1,146,298
Stock options and warrants issued
for services........................... - - 840,000
Stock issued for litigation settlement.... 10,000 10 49,990
Stock of director and officer exchanged
for litigation settlement.............. - - 750,000
Stock issued to acquire controlling
interest in Heartland Fuels Corp....... 375,000 375 1,874,625
Discount on issuance of promissory
notes converted to common stock........ - - 52,000
Net loss.................................. - - - (6,228,720)
---------- ------- ----------- -------------
Balance, December 31, 1995................ 22,159,374 22,159 42,293,556 (28,563,187)
Stock issued for cash..................... 382,000 382 1,449,498
Stock issued for services and board
of director fees....................... 134,666 135 650,039
Warrants issued for services.............. - - 300,000
Net loss.................................. - - - (5,628,541)
---------- ------- ----------- -------------
Balance, December 31, 1996................ 22,676,040 $22,676 $44,693,093 $(34,191,728)
========== ======= =========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
KFX INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
-----------------------------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss)...........................$(5,628,541) $(6,228,720) $ 2,349,126
Adjustments to reconcile net income
(loss) to cash used in operating
activities:
Income tax benefit and
extraordinary item.................... - (2,567,209) (8,468,803)
Depreciation and amortization........... 1,861,164 1,657,385 1,406,455
Write-down of mine property and
reclamation costs..................... 700,500 - -
Amortization of discount on notes
payable............................... - 273,000 135,000
Common stock issued for services........ - 713,919 907,710
Stock options and warrants issued for... 237,500 840,000 -
services
Common stock issued by the Company
and a director and officer to settle.. - 800,000 -
litigation
Promissory notes exchanged for services. - 30,000 93,455
Other, net.............................. - (105,794) -
Changes in operating assets and
liabilities:
Accounts receivable and prepaid
expenses............................... (669,687) 62,918 (4,433)
Trade and related party payables......... 569,925 120,685 317,30
Accrued interest and other
liabilities............................ (28,886) 720,797 783,467
Prepaid royalty.......................... (300,000) - -
Other.................................... 49,141 - 10,430
----------- ----------- ----------
Cash used in operating activities............. (3,208,884) (3,683,019) (2,470,292)
------------ ----------- ----------
INVESTING ACTIVITIES:
Reclamation deposit......................... 1,503,032 (1,503,032) -
Patents acquisition and pending patent
applications.............................. (35,918) (1,092,652) (17,237)
Investments in K-Fuel, L.L.C................ (243,752) - -
Development costs credited to KFX Fuel
Partners.................................. - 107,114) (513,205)
Acquisition of Heartland Fuels
Corporation stock......................... - (100,000) -
Purchases of property and equipment......... (211,700) (70,656) (8,891)
Other....................................... (130,221) (8,180) 40,425
------------ ----------- ------------
Cash provided by (used in) investing
activities.................................. 881,441 (2,881,634) (498,908)
------------ ----------- ------------
FINANCING ACTIVITIES:
Net proceeds from sale of common stock...... 1,449,880 10,096,875 1,933,026
Proceeds from issuance of promissory
notes..................................... - 1,490,000 1,237,569
Payments on promissory notes................ (588,851) (2,231,447) (182,318)
------------ ----------- ------------
Cash provided by financing activities......... 861,029 9,355,428 2,988,277
------------ ----------- ------------
Increase (decrease) in cash and cash
equivalents................................. (1,466,414) 2,790,775 19,077
Cash and cash equivalents, beginning of
period...................................... 2,870,039 79,264 60,187
----------- ----------- ----------
Cash and cash equivalents,
end of period...............................$ 1,403,625 $ 2,870,039 $ 79,264
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
KFX INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
--------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest............. $157,404 $297,821 $28,002
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
See Notes 2, 3, 4, 7, 9, 10, 13 and 16.
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of KFX Inc.
("KFX" or the "Company"), its wholly-owned subsidiary, KFX Wyoming, Inc.
("KFXW"), and its majority-owned subsidiaries, KFX Technology, Inc. ("KFXT",
formerly Energy Brothers Technology, Inc.), Atlantic Partners, Ltd. ("APL"), and
Heartland Fuels Corporation ("HFC"). The Company's 67 percent interest in KSA
Partnership ("KSA"), its 51 percent interest in K-Fuel, L.L.C. ("K-Fuel"), and
its 5 percent interest in KFX Fuel Partners, L.P. ("KFP") are accounted for as
equity investments as the Company does not have the authority or ability to
independently control or manage these entities. All significant intercompany
transactions have been eliminated in consolidation.
The Company holds patents to the K-Fuel Technology which enhances the
combustion characteristics of coal and other carbonaceous fuels. The Company
intends to generate revenue by licensing the K-Fuel Technology to third party
operators or by the direct ownership and management of K-Fuel production
facilities.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. At December
31, 1996, cash and cash equivalents included money market and mutual fund
accounts of $1,317,420. Such amounts are carried at cost which at December 31,
1996 approximates fair market value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Expenditures that
extend the useful lives of assets are capitalized. Repairs and maintenance that
do not extend the useful lives of the assets are expensed as incurred.
Depreciation expense is computed using the straight-line method over the
following estimated useful lives:
Plant, machinery and equipment 7-15 years
Office furniture and equipment 3-5 years
PATENTS
The Company holds patents to the Series "A", "B" and "C" K-Fuel
Technology. The costs of obtaining new patents are capitalized; costs of
defending and maintaining patents are expensed as incurred. Patents are
amortized over the lives of the respective patents of 17 to 20 years for
domestic patents and 5 to 20 years for foreign patents.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
F-8
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
INCOME (LOSS) PER SHARE
The computation of net income (loss) per share is based upon the
weighted average shares of common stock and common stock equivalents (dilutive
stock options and warrants and convertible securities) outstanding during the
period. Proceeds from the assumed exercise of the dilutive stock options and
warrants are assumed to be used to repurchase outstanding shares of the
Company's common stock at the average fair market value during the period. Net
loss per common share before income taxes and extraordinary items excludes
common equivalent shares as the effect would be anti-dilutive.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenue and expenses during the periods
presented. Significant estimates have been made by management with respect to
the realizability of the Company's property, plant and equipment, patents,
investment in KFP, prepaid royalty, mine reclamation liability, and the possible
outcome of outstanding litigation. Actual results could differ from these
estimates, making it possible that a change in these estimates could occur in
the near term. See Notes 2, 3, 4, 7, 11 and 14 for additional information with
respect to these estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1994
financial statements to conform to the current year presentation.
FUTURE SOURCES OF FUNDS
The Company's current cash balances, the expected revenues to be
derived from the Company's research and development subcontract agreements with
K-Fuel LLC, and the royalty income to be derived from the commencement of
operations of KFP in 1997 are expected to fund the Company's operations and debt
service requirements until the first quarter of 1998 based on current operating
plans and budgets. The Company does not expect to realize any significant net
revenues from its 5 percent ownership interest in KFP during 1997. The Company
will need to realize additional operating funding sources and reduce certain
operating expenses to sustain operations into 1998 and beyond. Such potential
sources of funding may include, but are not limited to (1) the proposed sale of
all or a portion of the Company's 5 percent interest in KFP; (2) certain
development and license fees that may be derived from a potential expansion of
the existing KFP production facility; (3) license fees to be derived from a
proposed Indonesia K-Fuel production facility in late 1997 or early 1998; and
(4) certain development and license fees to be derived from the proposed
commencement of construction of an additional K-Fuel production facility near
Gillette, Wyoming. There are no assurances that any of these potential funding
sources will materialize, and the Company does not currently have any
commitments with respect to any such funding sources. If such events do not
materialize, the Company may be forced to seek debt and/or equity financing on
terms and conditions that may not be favorable to the Company, if available at
all. The Company does not currently have any commitments with respect to any
debt or equity financing.
F-9
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
-------------------------
<S> <C> <C>
Demonstration plant................... $10,854,375 $10,854,375
Mine property......................... 465,500 1,032,012
Laboratory equipment.................. 51,307 -
Buildings............................. 90,781 -
Office and computer equipment......... 178,988 112,927
----------- -----------
11,640,951 11,999,314
Less accumulated depreciation......... (6,182,150) (5,347,756)
----------- -----------
$ 5,458,801 $ 6,651,558
=========== ===========
</TABLE>
Depreciation expense was $837,945 and $798,141 in 1996 and 1995,
respectively. In August 1995, the Company contributed laboratory equipment,
buildings and other equipment with a net book value of $410,645 to KFP. See
Note 4.
In order to facilitate the development of the production facility
discussed in Note 4, in August 1995 the Company acquired certain coal mining and
surface properties near Gillette, Wyoming from Fort Union, Ltd. ("Fort Union").
Such properties include approximately 1.3 million tons of coal reserves which
will be depleted using the units of production method, if and when mined. The
consideration paid for the properties is in the form of a royalty share
agreement whereby the Company is required to pay Fort Union an amount equal to
20 percent of the royalty income received by the Company from all North American
applications of the K-Fuel process until the earlier of such time as (1) Fort
Union has received royalty share payments in the amount of $1,500,000, or (2)
September 15, 2015. Additionally, the Company was required to assume Fort
Union's reclamation liabilities related to the acquired properties. As a
result, the Company was required to deposit $1,503,032 into an escrow account to
ensure the performance of the reclamation obligations until such time as Fort
Union has been fully and finally released from all liability for the reclamation
obligations. In November 1995, the Company and KFP submitted a joint permit
application to the Wyoming Department of Environmental Quality, Land Quality
Division ("DEQ") that was approved in April 1996 and resulted in (1) the
transfer all of Fort Union's reclamation obligations with respect to the
acquired properties to the Company and KFP, and (2) the return of the escrow
reclamation deposit to the Company.
The mine reclamation liability of $1,166,000 at December 31, 1996
represents the estimated cost to the Company to reclaim the property in
compliance with minimum standards established by the State of Wyoming and
various governmental agencies. In connection with obtaining a permit to conduct
mining and reclamation operations, the Company has entered into a bond agreement
to ensure payment of reclamation costs.
F-10
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
When acquired, it was the Company's intent to sell this coal mining
property. However, in 1996 the Company determined that it would not sell it;
rather, it would be retained for purposes of a reserve supply of coal to be used
in the KFP production facility if ever needed. In 1996, the Company also
reassessed the value of this asset in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of," and wrote down its
investment in mining property to an estimated fair market value of $465,500.
The charge of $566,512 is reflected in the results of operations of the Company
for the year ended December 31, 1996.
NOTE 3. PATENTS
Patents consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
------------------------
<S> <C> <C>
Series "A" and "B" patents.............. $ 8,800,000 $ 8,800,000
Series "C" patents...................... 1,335,134 1,335,134
Foreign patents - granted............... 212,922 192,271
Domestic and foreign patents - pending.. 123,329 153,810
Other................................... 18,725 18,725
----------- -----------
10,490,110 10,499,940
Less accumulated amortization........... (6,827,216) (6,226,357)
----------- -----------
$ 3,662,894 $ 4,273,583
=========== ===========
</TABLE>
Patents amortization expense, including abandoned patents, was $646,607 and
$568,600 in 1996 and 1995, respectively. The Series "C" patents were acquired
in August 1995 by the payment of $1,000,000 cash and the issuance of a $335,134
promissory note that was paid in 1996.
NOTE 4. INVESTMENT IN KFX FUEL PARTNERS, L.P.
In August 1995, the Company acquired a 5 percent general and limited
partnership interest in KFX Fuel Partners, L.P. ("KFP"). The remaining 95
percent general and limited partnership interest in KFP is held by Thermo Ecotek
Corporation ("TCK"). In September 1995, KFP began construction of a 500,000
tons-per-year K-Fuel production facility near Gillette, Wyoming. At December
31, 1996, total construction costs of the facility were approximately $45
million, and were funded entirely by TCK. As part of its investment in 1995,
the Company contributed to KFP certain assets from its demonstration facility
near Gillette, Wyoming with a book value of approximately $411,000, and certain
permitting and engineering costs incurred by the Company totaling approximately
$620,000. Additionally, as a condition of acquiring the 5 percent interest in
KFP, in August 1995 the Company acquired an additional 80 percent interest in
Heartland Fuels Corporation ("HFC") in exchange for 375,000 shares of the
Company's common stock valued at $1,875,000, a cash payment of $100,000, and a
promissory note of $150,000 due in February 1996. HFC's only asset is a license
to the Company's Series "A" and "B" K-Fuel technology. Prior to the HFC
transaction, the Company held a 5 percent interest in HFC and was indebted to
HFC in the amount of approximately $364,000. The total consideration paid for
the HFC interest, less the indebtedness of the Company to HFC, was also recorded
as part of the Company's investment in KFP.
F-11
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In addition to its 5 percent interest in KFP, the Company will receive a
royalty of 3 percent of the net sales of the KFP facility.
On December 24, 1996, a fire destroyed one of two oil heating systems
that provide the main processing structure (comprised of four processing
vessels) with heat transfer fluid. It is estimated that KFP's insurance will
cover substantially all of the costs of replacing the destroyed equipment.
Commercial operations of the KFP facility (i.e., shipment of fuel product to
purchasers or stockpiling of product on the KFP site) are expected to begin in
the second quarter of 1997 for the two processing vessels unaffected by the
fire, and in the second half of 1997 for the other two processing vessels that
were affected by the fire damage to the oil heating system. Total production of
the KFP facility is expected to reach its full output of 500,000 TPY beginning
in 1998. As of December 31, 1996, TCK was committed to fund approximately $5
million to complete construction and start-up of the KFP facility.
As of December 31, 1996, KFP had construction in progress of
approximately $44,736,000 and current liabilities of approximately $1,893,000.
For the year ended December 31, 1996, KFP generated no revenues and had no net
income. This was a result of all of KFP's efforts being directed towards
construction of the facility discussed above.
NOTE 5. THERMO ECOTEK CORPORATION STOCK PURCHASE AGREEMENT
In August 1995, the Company and Thermo Ecotek Corporation ("TCK") entered into
a stock purchase agreement (the "Stock Purchase Agreement") whereby TCK acquired
1,500,000 shares of the Company's common stock for $3 million, and the right to
purchase up to an additional 2,750,000 shares of the Company's common stock at
the same price per share. In December 1995, TCK purchased an additional
1,500,000 shares for $3 million. Additionally, TCK purchased the remaining
1,250,000 shares of common stock in January 1997 for $2.5 million, increasing
its ownership in the Company from approximately 14 percent to approximately 18
percent.
In addition, as part of the Stock Purchase Agreement, the Company
issued two common stock purchase warrants to TCK. The first warrant ("Warrant
A") is for 7,750,000 shares of common stock of the Company at an exercise price
of $3.65 per share (subject to certain adjustments), and is exercisable, in
whole or in part, commencing on January 1, 2000 and expiring on July 31, 2001.
The second warrant ("Warrant B") gives TCK the right to purchase the number of
shares of common stock that, when added to the shares owned by TCK on the
exercise date or which TCK has the right to acquire 60 days after the exercise
date, would be sufficient to give TCK ownership of 51 percent of the outstanding
shares of common stock of the Company, on a fully diluted basis, on the exercise
date. Warrant B is exercisable, in whole or in part, commencing on
January 1, 2000 and expiring on July 31, 2001, provided, however, that Warrant
B may not be exercised unless TCK has fully exercised Warrant A. The exercise
price of Warrant B will be the average daily closing price of the common stock
for the 40 trading days immediately preceding the exercise date.
F-12
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 6. INVESTMENT IN K-FUEL, L.L.C.
In April 1996, the Company and Kennecott Alternative Fuels, Inc.
("KAFI"), a wholly-owned subsidiary of Kennecott Energy and Coal Company
("KECC"), formed K-Fuel, L.L.C., a Delaware limited liability company ("K-Fuel
LLC"). Pursuant to the Limited Liability Company Agreement (the "Agreement"), K-
Fuel LLC will be the vehicle for further technical advancement and the
commercialization of business opportunities arising out of the K-Fuel
Technology, including research and development, sublicensing, marketing and
consulting, but not including any actual construction of plants or facilities to
produce K-Fuel products on a commercial basis ("Commercial Projects").
Commercial Projects will be constructed by separate entities in which KAFI, the
Company or both will have an equity interest and which will receive a sublicense
from K-Fuel LLC for the K-Fuel Technology.
Initially, the Company has a 51 percent interest in K-Fuel LLC and
KAFI has a 49 percent interest, except to the extent of certain research and
development and amortization expenses, which by written agreement are allocated
100 percent to KAFI. At such time as entities in which KAFI has an equity
interest have placed into service Commercial Projects with a collective design
capacity equal to or in excess of 3 million tons of K-Fuel product per annum,
KAFI will have a 51 percent interest in K-Fuel LLC and the Company will have a
49 percent interest. A fee of $1,000,000 was paid to the Company in
consideration for the Company entering into the Agreement, and has been recorded
by the Company as joint venture fee revenue in 1996. Subject to certain
conditions, KAFI has also agreed to make additional capital contributions to K-
Fuel LLC in such amounts as may be necessary for all research and development
costs incurred by K-Fuel LLC, up to $4,000,000. During 1996, KAFI funded such
research and development costs totaling approximately $1,440,000. Additionally,
in 1996 the Company and KAFI contributed to K-Fuel LLC approximately $386,000
and $371,000, respectively, for certain administrative, marketing and project
development activities in the United States and Indonesia. As of December 31,
1996, K-Fuel LLC was not committed to fund or construct any Commercial Projects.
The activities and financial results of K-Fuel LLC are accounted for
by the Company using the equity method, rather than consolidated, as the Company
does not have the authority to independently control K-Fuel LLC. The Company's
investment in K-Fuel LLC at December 31, 1996 was approximately $157,000.
In connection with the Agreement, the Company granted K-Fuel LLC an
exclusive, worldwide, fully-paid, royalty-free right and license (including the
right to grant sublicenses) to and under the K-Fuel Technology, except to the
extent that it pertains to the beneficiation or restructuring of coal or coal
related feedstocks covered under the HFC License (as defined below) (the "KFX
License"). In addition, Heartland Fuels Corporation, an 85 percent owned
subsidiary of the Company, granted K-Fuel LLC an exclusive, worldwide, fully-
paid, royalty-free right and license (including the right to grant sublicenses)
to and under the Series "A" and Series "B" K-Fuel Technology, as it pertains to
the beneficiation or restructuring of coal or coal related feedstocks (the "HFC
License"). Both the KFX License and the HFC License specify minimum terms and
provisions for any sublicenses granted by K-Fuel LLC to third parties.
F-13
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 7. PREPAID ROYALTY
In June 1996, the Company entered into a royalty amendment agreement with
Edward Koppelman, the inventor of the K-Fuel Technology. Prior to the
agreement, Mr. Koppelman was entitled to a royalty of 2 percent on the gross
sales value of K-Fuel product produced by any entity, including any product
produced by the Company. As a result of the agreement, Mr. Koppelman's royalty
is now 25 percent of the Company's worldwide royalty and license fee revenue,
computed after the State of Wyoming royalty as discussed at Note 13. The
royalty to Mr. Koppelman will cease when the cumulative payments to him reach
the sum of approximately $75,222,000.
As consideration for the royalty amendment agreement, the Company paid Mr.
Koppelman $300,000 cash and issued a promissory note in the amount of $200,000,
due in June 1998. A $25,000 payment was made on the promissory note in 1996.
See Note 9. The $500,000 prepaid royalty will be amortized based on the
difference between what royalty payments to Mr. Koppelman would have been on the
original royalty agreement and the amended royalty agreement reached in 1996.
NOTE 8. DUE TO RELATED PARTIES
Due to related parties consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
-------------------
<S> <C> <C>
Due to board of directors, payable in common stock ..... $ - $209,780
Due to board of directors, payable in cash ............. 27,800 -
Due to officers of the Company, payable in cash ........ 113,708 89,076
Due to KSA Partnership, payable in cash................. 286,958 286,958
Due to K-Fuel, L.L.C., payable in cash.................. 250,000 -
Due to other related parties, payable in cash .......... 29,290 -
-------- --------
Total related party liabilities..................... $707,756 $585,814
======== ========
</TABLE>
F-14
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 9. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
-----------------------
<S> <C> <C>
Unsecured promissory note, interest at
6.5 percent and payable annually, no
principal payments due until maturity
in February 1998....................... $ 650,000 $ 650,000
Unsecured promissory note, interest at
8.0 percent, quarterly principal and
interest payments of $10,000 beginning
in January 1996 until October 1998, when
any remaining principal balance
is due................................. 300,000 328,717
Unsecured promissory note to related
party, interest at prime rate
plus 2 percent, interest payable
quarterly beginning in December 1995,
principal payable in semi-annual
installments of $50,000 beginning in
December 1995 until September 1997
September 1997, paid in January 1997... 100,000 150,000
Unsecured promissory note, interest at
prime rate (8.25 percent at December
31, 1996) and payable annually, no
principal payments due until maturity
in June 1998 .......................... 175,000 -
Unsecured promissory note, interest at
prime rate, scheduled maturity date of
August 1998, paid in April 1996 ....... - 335,134
Promissory note secured by Heartland
Fuel Corporation common stock, no
interest, paid in February 1996 ....... - 150,000
---------- ----------
1,225,000 1,613,851
Less current maturities................... (115,000) (214,000)
---------- ----------
$1,110,000 $1,399,851
========== ==========
</TABLE>
Scheduled maturities of long-term debt at December 31, 1996 are as
follows: $115,000 in 1997, and $1,110,000 in 1998.
The promissory note of $175,000 at December 31, 1996 was issued as
part of a royalty amendment agreement. See Note 7.
The promissory note of $328,717 at December 31, 1995 includes accrued
interest payable of $116,624 renegotiated in 1995.
The promissory note of $335,134 at December 31, 1995 was issued as
part of a patent acquisition. See Note 3.
In July 1995, the Company completed a debt settlement agreement
whereby promissory notes and accrued interest obligations totaling $2,867,209,
including accrued interest of $940,209 at December 31, 1994, were extinguished
for cash payments totaling $300,000.
F-15
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 10. STOCKHOLDERS' EQUITY
During 1996, the Company issued 382,000 shares of common stock for net
cash proceeds of $1,449,880, resulting from the exercise of outstanding common
stock purchase warrants issued prior to 1996.
During 1996, the Company issued (1) 93,240 shares of common stock and
warrants to purchase 200,000 shares of common stock in exchange for professional
service fee obligations totaling $740,394, of which $502,894 was accrued at
December 31, 1995, and (2) 41,426 shares of common stock in exchange for 1995
board of director fees totaling $209,780 which were accrued at December 31,
1995. The warrants are exercisable for $4.00 per share and expire 100,000 each
in November and December 1999.
During 1995, the Company also issued (1) 192,778 shares of common stock for
professional service obligations totaling $979,216, of which $265,297 was
accrued at December 31, 1994, and (2) 40,312 shares of common stock in exchange
for 1994 board of director fees totaling $167,315 which were accrued at December
31, 1994.
During 1995, the Company issued 374,727 shares of common stock in
exchange for promissory notes and accrued interest obligation totaling
$1,580,723.
In May 1995, the Company reached a settlement agreement regarding a
legal claim brought against the Company and a director and officer of the
Company in 1994. As part of the settlement agreement, the Company issued 10,000
shares of common stock valued at $50,000, and a director and officer of the
Company transferred in January 1996 150,000 shares of common stock held by him
which was valued at $750,000. The 1995 consolidated statement of operations
includes an aggregate $800,000 non-cash charge related to this litigation
settlement, and includes the value of the common stock transferred by the
director and officer of the Company as he acted on behalf of the Company.
In August 1995 and related to a sale of common stock by the Company, the
Company issued a common stock purchase warrant to purchase 50,000 shares of
common stock at $4.00 per share, expiring in August 1997.
In August 1995, the Company issued 375,000 shares of common stock to
acquire an 80 percent interest in HFC. See Note 4.
In 1994, the Company issued 151,912 shares of common stock in exchange
for accounting, legal, consulting and legal services valued at $697,715, and
issued 250,000 shares of common stock to acquire an additional interest in APL
and for past and future consulting services. The 250,000 shares were valued at
$1,125,000 and allocated to past and future consulting services. No value was
allocated to the APL interest. $562,000 of the consulting services allocation
was expensed in 1994, $281,500 in 1995, and $281,500 in 1996. See Note 16.
F-16
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 11. STOCK OPTION PLANS
The Company has two employee stock option plans - the Amended and
Restated Stock Option Plan (the "1992 Plan"), and the 1996 Stock Option and
Incentive Plan (the "1996 Plan").
The 1992 Plan provides for the award to executive officers (including officers
who are also directors), non-employee directors and other key employees of the
Company of either non-qualified stock options ("NSO") or incentive stock options
("ISO"), as defined in Section 422 of the United States Internal Revenue Code.
Stock options, either NSO or ISO, granted under the 1992 Plan vest 20 percent on
the date of grant, with an additional 20 percent vesting on each anniversary
date of the grant until fully vested, unless other terms of vesting are
specified by the Compensation Committee of the Board of Directors (the
"Committee"). Additionally, the Committee can accelerate the vesting of an
outstanding option at its sole discretion, and is required to accelerate the
vesting of all outstanding options outstanding under the 1992 Plan in the event
of a change in control of the Company, which is defined as (1) when any person
(as such term is defined in Sections 13(d) and 14(d) of the Securities Exchange
Act of 1934) becomes the beneficial owner of 15% or more of the total number of
shares of common stock then outstanding; (2) the Board of Directors or
shareholders approve the sale of all or substantially all of the assets of the
Company or any merger with or into the Company; or (3) the Company declares a
cash dividend in an amount in excess of 10 percent of the then fair market value
of the outstanding shares of common stock. All stock options granted under the
1992 Plan expire ten years from the date of grant. The Company has reserved
1,000,000 shares of common stock for issuance under the 1992 Plan.
The 1996 Plan provides for the award to executive officers, non-
employee directors and other key employees of the Company of only non-qualified
stock options. Stock options granted under the 1996 Plan vest 20 percent on the
first anniversary date of the grant, and an additional 20 percent each
anniversary date thereafter until fully vested. The Committee has similar
authority to accelerate the vesting of any outstanding option as with the 1992
Plan, except there are no specific change in control vesting requirements in the
1996 Plan. All stock options granted under the 1996 Plan expire seven years
from the date of grant. The Company has reserved 1,500,000 shares of common
stock for issuance under the 1996 Plan.
F-17
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes the Company's stock option activity for
the three-year period ending December 31, 1996:
<TABLE>
<CAPTION>
EXERCISABLE
-----------
WEIGHTED NUMBER OF WEIGHTED
NUMBER OF NUMBER OF AVERAGE SHARES AVERAGE
SHARES, SHARES, PRICE EXERCISABLE OPTION PRICE
1992 PLAN 1996 PLAN TOTAL PER SHARE AT 12-31-96 PER SHARE
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, 12-31-93 - - - - - -
Granted .......... 630,000 - 630,000 $5.02 198,000 $5.38
--------- ---------
Balance, 12-31-94 630,000 - 630,000
Granted .......... 370,000 - 370,000 $5.19 128,000 $5.21
Cancelled ....... (350,000) (350,000)
--------- ---------
Balance, 12-31-95 650,000 - 650,000
Granted .......... 350,000 525,500 875,500 $6.46 50,000 $7.23
Cancelled ....... (30,000) - (30,000)
--------- ------- -------- ----------- ------------
Balance, 12-31-96 970,000 525,500 1,495,500 376,000 $5.57
=========== ============
Remaining shares
authorized ....... 30,000 974,500 1,004,500
--------- --------- ---------
Total authorized... 1,000,000 1,500,000 2,500,000
========= ========= =========
</TABLE>
The range of exercise prices for stock options granted under the 1992
Plan and the 1996 Plan are as follows: 1994 - $4.63 to $5.38 per share; 1995 -
$5.13 to $5.64 per share; 1996 - $5.09 to $7.43 per share. All stock options
granted under the 1992 Plan and the 1996 Plan in 1994, 1995 and 1996 were at
exercise prices that were not below the fair market value of the Company's
common stock on the date of grant.
As a result of TCK's purchase of the Company's common stock in January
1997, all non-vested stock options under the 1992 Plan became fully vested as
TCK's ownership of the Company now exceeds 15 percent. The following table
summaries the 1992 Plan after the vesting of outstanding options on January 31,
1997:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED NUMBER OF WEIGHTED
NUMBER OF SHARES AVERAGE SHARES AVERAGE
SHARES EXERCISABLE OPTION PRICE EXERCISABLE OPTION PRICE
OUTSTANDING AT 12-31-96 PER SHARE AT 1-31-97 PER SHARE
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
970,000 326,000 $5.32 970,000 $5.23
</TABLE>
F-18
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." This new standard defines a fair value approach of accounting
for employee stock options or similar equity instruments. As permitted under
SFAS No. 123, the Company has elected to continue measuring compensation expense
under Accounting Principles Board ("APB") No. 25, which uses an intrinsic value
approach to measuring compensation expense, i.e., compensation expense is
generally recognized only when the exercise price of an employee stock option or
similar equity instrument is below the fair market value of the underlying
common stock on the date of grant. The following table summaries the pro forma
effects on net loss for the two most recent fiscal years as if the Company had
elected to implement SFAS No. 123:
<TABLE>
<CAPTION> YEAR ENDED DECEMBER 31,
1996 1995
---------------------------
<S> <C> <C>
Net loss - as reported................. $(5,628,541) $(6,228,720)
Net loss - pro forma................... $(6,320,601) $(6,689,280)
Net loss per share - as reported....... $ (.25) $ (.33)
Net loss per share - pro forma......... $ (.28) $ (.36)
</TABLE>
The fair value of options granted under the 1992 Plan and the 1996
Plan were estimated using the Black-Scholes option pricing model. The following
table summarizes the assumptions used for valuing each grant:
<TABLE>
<CAPTION>
EXPECTED LIFE EXPECTED
NUMBER OF OF OPTION DIVIDEND RISK-FREE VOLATILITY
SHARES (YEARS) YIELD INTEREST RATE PERCENTAGE
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Granted in 1995 .......... 320,000 10 NA 7.31 % 47.7 %
Granted in 1995 .......... 50,000 5 NA 6.88 % 47.7 %
-------
Total 1995............... 370,000
=======
Granted in 1996 .......... 350,000 7 NA 6.33 % 54.5 %
Granted in 1996 .......... 455,000 7 NA 6.90 % 55.0 %
Granted in 1996 ............ 50,000 7 NA 6.89 % 54.9 %
Granted in 1996 ............ 20,500 7 NA 6.25 % 53.5 %
-------
Total 1996............... 875,500
=======
</TABLE>
F-19
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In addition to the 1992 Plan and the 1996 Plan, the Company has issued
non-qualified stock options related to various compensation agreements with
consultants and current and former employees of the Company. The following
table summaries the terms of such grants as of December 31, 1996:
<TABLE>
<CAPTION>
EXERCISABLE
-----------
WEIGHTED NUMBER OF WEIGHTED
AVERAGE SHARES AVERAGE
NUMBER OF OPTION PRICE EXERCISABLE OPTION PRICE
SHARES PER SHARE AT 12-31-96 PER SHARE
---------------------------------------------------
<S> <C> <C> <C> <C>
Granted in 1993......................... 90,000 $9.00 90,000 $9.00
Granted in 1995......................... 630,000 $3.20 630,000 $3.20
Granted in 1996......................... 150,000 $5.00 - -
--------- -------
Outstanding at December 31, 1996 ....... 870,000 720,000
=======
Shares authorized and remaining
to be granted in 1997 and 1998 ........ 300,000 $5.00
---------
Total granted and authorized 1,170,000
=========
</TABLE>
The grant of options for 150,000 shares in 1996 is included in the pro
forma effects of SFAS No. 123 for the year ended December 31, 1996. Relating to
the grant of options for 630,000 shares in 1995, the Company recorded non-cash
charges totaling $840,000 in the year ended December 31, 1995, including a
charge of $190,000 resulting from the cancellation of options for 350,000 shares
and the granting of options for 130,000 shares, of which options for 120,000
shares were repriced from the original option price of $4.63 per share to $4.13
per share.
See Note 5 regarding the option of TCK to acquire up to 7,750,000
shares of the Company's common stock beginning in January 2000.
NOTE 12. WARRANTS TO PURCHASE COMMON STOCK
Associated with various financing transactions and professional
services agreements, the Company has issued transferable warrants to purchase
common stock. The following table summaries the outstanding warrants as of
December 31, 1996, all of which are fully exercisable as of that date:
<TABLE>
<CAPTION>
TYPE OF NUMBER OF EXERCISE PRICE
TRANSACTION SHARES PER SHARE EXPIRATION DATE
---------------------------------------------------------
<S> <C> <C> <C> <C>
Granted in 1994 or prior... Services 80,000 $4.00 August 3, 1998
Granted in 1995 ........... Financing 50,000 $4.00 August 2, 1997
Granted in 1995 ........... Financing 5,000 $5.00 April 15, 1997
Granted in 1996 ........... Services 100,000 $4.00 November 5, 1999
Granted in 1996 ........... Services 100,000 $4.00 December 15, 1999
-------
335,000
=======
</TABLE>
Related to the issuance of the warrants in 1996 for services, the
Company recorded non-cash charges of $237,500 and $62,500 in 1996 and 1995,
respectively, for the difference between the fair market value per share of the
Company's common stock and the warrant price on the date of the issuance.
F-20
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 13. STATE OF WYOMING DEBT EXTINGUISHMENT
In February 1994, the Company reached an agreement with the State of Wyoming
("State") to restructure the bond and accrued interest obligations of KFXT,
formerly Energy Brothers Technology, Inc. The State agreed to take ownership of
the Company's guaranteed investment contracts and cancel all but $650,000 of the
bond principal and accrued interest obligations. In exchange, the Company
agreed to convey to the State a 12 percent ownership interest in the Company's
K-Fuel technology patents. When the cumulative revenue to the State, from
license fees and royalty payments, reaches $5 million, the State's interest will
decrease to 6 percent. The State will retain the remaining 6 percent interest
thereafter, unless reacquired by the Company in an arm's length negotiation.
The remaining $650,000 note to the State carries annual interest at
6.5 percent and is due on February 28, 1998. As part of the agreement with the
State, Energy Brothers Holding, Inc., an affiliate of the Company, and an
officer and director of the Company executed a promissory note to the State in
the amount of $819,000, with annual interest at 6 percent. This amount will be
deemed to be paid when the revenue to the State from the Company's patent rights
conveyance reaches $3 million. The Company has agreed to indemnify the officer
and director to the extent that payments are made to the State under the
agreement. In 1995, the Company paid the State approximately $50,300 that
related to the interest due under the officer and director's promissory note.
As a result of the above debt extinguishment transaction, the Company
recognized a gross extraordinary gain of $8,468,803 in 1994. The components of
the gain are as follows:
<TABLE>
<CAPTION>
<S> <C>
State of Wyoming bonds and accrued interest ................ $15,319,327
Guaranteed investment contracts ............................ (5,623,418)
12 percent of net patent costs ............................. (527,504)
New note to State of Wyoming ............................... (650,000)
Other....................................................... (49,602)
-----------
Net gain from debt extinguishment................... $ 8,468,803
============
</TABLE>
NOTE 14. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is obligated for noncancelable operating leases with
initial terms exceeding one year relating to office space and certain equipment
and vehicle leases. The lease agreements require future minimum lease payments
as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT PAYABLE
------------------------ --------------
<S> <C>
1997 $187,920
1998 153,720
1999 102,584
2000 63,721
--------
$507,945
========
</TABLE>
Rent expense in 1996, 1995 and 1994 was $226,025, $146,436 and $136,652,
respectively.
F-21
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In December 1996, the Company formed KFX Fuel Partners II, L.P. ("KFP
II"), a Delaware limited partnership, related to a proposed K-Fuel production
plant in Gillette, Wyoming adjacent to the existing production facility as
discussed at Note 4. The Company currently holds 100 percent of the general and
limited partner interests of KFP II, which as of December 31, 1996 had no assets
or liabilities.
Pursuant to a Pledge Agreement dated April 19, 1996 between an officer
and director of the Company and KECC, the same officer and director pledged to
KECC 500,000 shares of his ownership of the Company's common stock in the event
KECC suffers any loss related to possible losses from the purchase and sale of
product pursuant to a fuel purchase option between KECC and KFP dated April 19,
1996.
The Company is contingently liable to Ohio Valley Electric Corporation
("OVEC") for an overriding royalty of 0.5 percent to OVEC on the gross revenues
generated by the sale of fuel produced from any production plant (other than the
current facility being constructed by KFP) located in the United States in which
the feedstock is coal and which uses the Company's proprietary Series "C" K-Fuel
technology to produce fuel. See Note 4.
The Company is contingently liable to Fort Union for 20 percent of the
Company's North American royalty proceeds. This obligation expires upon the
earlier of (1) the cumulative payment to Fort Union of $1.5 million, or (2)
September 15, 2015.
Pursuant to an Indemnity Agreement dated August 18, 1995 between the
Company and TCK, the parties agreed, among other things, that (i) neither party,
nor any affiliate thereof may build, construct or operate, or have any interest
in a plant or facility, except as contemplated by the OVEC Fuel Option Agreement
and the I&M Fuel Option Agreement that would compete, directly or indirectly,
with the Project until the earlier of (a) five years after the date the KFP
Project commences commercial operation, (b) the date on which KFP has entered
into contracts for the sale of a minimum of 70 percent of the output of the KFP
Project for a term of at least five years, and (c) the date on which the
combined KFP interests of the Company and TCK total less than 50.1 percent;
provided, however, that such limitation shall not apply to the operations or
activities of the parties with respect to international (excluding Canada and
Mexico) business ventures and activities; and (ii) the Company shall guarantee
any loan created pursuant to the Partnership Agreement relating to a capital
call for the license to mine coal. An officer and director of the Company has
pledged 225,000 shares of his ownership of the Company's common stock to
guarantee any obligations of the Company arising from the Indemnity Agreement.
F-22
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In November 1995, the Company filed a lawsuit against Fru-Con
Construction Corporation and Fru-Con Engineering, Inc. (collectively, "Fru-Con")
in the Wyoming State Court, 6th Judicial District. The action has been removed
to the United States District Court for the District of Wyoming. The Company's
lawsuit requests that the court enter a judgment that Fru-Con has no interest or
claim in or against the Company or any of the Company's property or interests,
or that Fru-Con is barred from such claims. Fru-Con had asserted claims for
approximately $1.8 million for engineering services and an interest in K-Fuel
plants built in North America by virtue of contractual arrangements with a
limited partnership sponsored by corporations in which a predecessor entity to
the Company had a partnership interest. Because the work done by Fru-Con was
for a limited partnership in which the Company's predecessor entity was not
a partner, and because payment for the work performed by Fru-Con was contingent
upon successful project financing which never materialized, as well as for other
legal and factual reasons, the Company believes that Fru-Con has no valid rights
or claims against the Company. Accordingly, the Company believes that the
ultimate resolution of this action will not have a material adverse impact on
the Company's financial position or results of operations.
NOTE 15. INCOME TAXES
All of the Company's operations are currently domestic, with income
taxable at the federal statutory rate of 34 percent. The tax benefit recorded
in 1995 and 1994 of $872,851 and $2,879,393, respectively, related to the
utilization of current year losses to offset taxes on the extraordinary gains
from debt extinguishment. Deferred tax assets (liabilities) were comprised of
the following:
<TABLE>
<CAPTION>
1996 1995
-------------------------
<S> <C> <C>
Gross deferred tax assets:
Loss carryforwards..................... $ 6,220,807 $4,654,284
Depreciation and amortization.......... 152,906 431,898
Deferred compensation.................. 508,498 324,778
Other.................................. 116,892 73,371
----------- ----------
Gross deferred tax assets........... 6,999,103 5,484,331
Deferred tax assets valuation
allowance.......................... (6,999,103) (5,484,331)
----------- ----------
Net deferred tax assets.......... 0 0
Gross deferred tax liabilities........... - -
----------- ----------
$ 0 $ 0
=========== ==========
</TABLE>
No net deferred tax asset has been recorded for loss carryforwards or
other deferred tax assets because it is currently more likely than not that such
benefits will no be realized. The change in the valuation allowance for the
current year reflects the changes in the above items. The Company's loss
carryforwards of approximately 18,296,000 expires in various amounts through
2011.
F-23
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company's total provision for income taxes in 1996, 1995 and 1994
were different from the amount expected by applying the statutory federal income
tax rate to the net loss from operations and the extraordinary item. The
approximate differences are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Expected tax on extraordinary item....... $ - $ 873,000 $2,879,000
Expected tax benefit on loss before
income taxes and extraordinary item.... (1,914,000) (2,991,000) (2,081,000)
----------- ----------- -----------
Total expected tax provision
(benefit)........................ (1,914,000) (2,118,000) 798,000
Non-deductible items..................... 142,000 716,000 (1,178,000)
Increase (decrease) in valuation
allowance.............................. 1,515,000 1,633,000 (1,217,000)
Other.................................... 257,000 (231,000) 1,597,000
----------- ----------- -----------
Total tax provision.................. $ 0 $ 0 $ 0
=========== =========== ===========
</TABLE>
NOTE 16. ATLANTIC PARTNERS, LTD.
In 1994, the Company acquired an additional 49 percent interest in
APL, increasing its total interest to 83 percent. Accordingly, APL's results of
operations from the acquisition date have been consolidated in these financial
statements. Prior to the acquisition, the Company's 34 percent interest in APL
was accounted for under the equity method. APL had no net assets on the
acquisition date. Accordingly, no value was assigned by the Company to this
additional interest. The pro forma impact of the acquisition on the Company's
financial position and results of operations was not significant. See Note 10.
F-24
<PAGE>
- --------------------------------------------------------------------------------
DESIGN-BUILD AGREEMENT
AND GENERAL CONDITIONS BETWEEN OWNER AND CONTRACTOR
(WHERE THE BASIS OF COMPENSATION FOR DESIGN AND
ENGINEERING IS FIXED RATE NOT TO EXCEED A MAXIMUM
AND COMPENSATION FOR THE WORK IS COST-PLUS,
NOT TO EXCEED A MAXIMUM AMOUNT)
- --------------------------------------------------------------------------------
OWNER: KFX FUEL PARTNERS II, L.P.
CONTRACTOR: YANKE ENERGY, INC.
DATE: DECEMBER 30, 1996
- 1 -
<PAGE>
TABLE OF CONTENTS
ARTICLES
ARTICLE 1..................................................................
The Construction, Approved Contractors, Extent of Agreement and Definitions
ARTICLE 2..................................................................
Contractor's Responsibilities
ARTICLE 3..................................................................
Owner's Responsibilities
ARTICLE 4..................................................................
Subcontracts
ARTICLE 5..................................................................
Contract Time Schedule
ARTICLE 6..................................................................
Fees for Development and Detailed Engineering
Cost-plus Percentage Basis Price for Construction
ARTICLE 7..................................................................
Changes in the Project
ARTICLE 8..................................................................
Payments to the Contractor
ARTICLE 9..................................................................
Indemnity, Insurance, Performance Bond
ARTICLE 10..................................................................
Termination of the Agreement and Owner's
Right to Perform Contractor's Obligations
ARTICLE 11..................................................................
Assignment and Governing Law
ARTICLE 12..................................................................
Proprietary Information; Inventions and Licenses
ARTICLE 13..................................................................
Arbitration
ARTICLE 14..................................................................
Definitions
ARTICLE 15..................................................................
- 2 -
<PAGE>
Miscellaneous
EXHIBITS
A. Work Scope
B. Project Schedule (Date: 11/05/96)
C. Design and Engineering Fee Schedule
D. Estimated Drawdown Schedule
E. Permits, Licenses and Government Approvals
F. Form of Progress Report
G. Form of Lien Waivers
H. Schedule of Approved Contractors/Subcontractors
I. Insurance Requirements
J. Requirements for Drawings, Specifications, and Operation and
Maintenance Manuals
K. Performance Guarantees and Performance Tests
L. Warranty Procedures
- 3 -
<PAGE>
AGREEMENT made as of this 30th day of December, 1996 by and between
KFX Fuel Partners II, L.P., a Delaware limited partnership with its principal
offices at 1999 Broadway, Suite 3200, Denver, Colorado 80202 (hereinafter
"Owner"), and Yanke Energy, Inc., an Idaho corporation with its principal
offices at 4414 S. Gekeler Lane, Boise, Idaho 83705 (hereinafter "Contractor")
for the design, procurement, construction and start-up, pursuant to the Work
Scope (attached hereto and incorporated by reference as Exhibit A) of the
following described Project: a Series "C" K-Fuel Plant to produce 640,000
(nominal) tons per year, at the Site in Section 32, Township 51 North, Range 71
West, 6th P. M., Campbell County, Wyoming (as more specifically located on
Drawing No. 1001-2, "Proposed Site Plan", KFX Fuel Partners II, L.P. (Yanke
Energy, Inc. 10/25/96)).
RECITALS
--------
A. Owner desires to engage Contractor to design, procure, construct,
start-up and test on a design-build basis, the Project on the Site.
B. (i) Owner will provide to Contractor, and Contractor will review
the conceptual drawings, designs and specifications and all other documents
relating to the design, procurement, construction, start-up and testing of the
nearly-completed Series "C" K-Fuel facility (hereinafter "Existing Facility")
constructed pursuant to that certain Turnkey Design and Construction Agreement
entered into as of August 21, 1995 between KFX Fuel Partners, L.P. and Walsh
Construction Company, a division of Guy F. Atkinson Company. (ii) Contractor
has been provided and reviewed all other documents relating to the Project which
Contractor and Owner have deemed necessary in connection with this Agreement.
(iii) Contractor has inspected the real property on which the Project is to be
constructed, and performed or reviewed such other investigations, studies and
analyses which Contractor has determined to be necessary or prudent in
connection with entering into this Agreement.
- 4 -
<PAGE>
C. Owner and Contractor desire to develop and incorporate into the
Project design improvements and efficiencies resulting from the testing and
operation of the Existing Facility and concepts identified in the CRA Parametric
test program.
D. Contractor desires to design, procure, construct, start-up and
test, on a design-build basis, the Project for Owner.
NOW, THEREFORE, in consideration of the sums to be paid to Contractor
by Owner and of the covenants and agreements set forth herein, and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto, intending to be legally bound, here agree as
follows:
ARTICLE 1
THE CONSTRUCTION, APPROVED CONTRACTORS AND EXTENT OF AGREEMENT
1.1 The Contractor, and such persons on the Schedule of Approved Contractors,
attached hereto and incorporated by reference as Exhibit H, that Contractor may
subcontract with from time to time constitutes the "Construction Team" which
shall work from the beginning of design through construction completion.
1.2 This Agreement represents the entire agreement between the Owner and the
Contractor and supersedes all prior negotiations, representations or agreements.
When the Drawings and Specifications are complete, they shall be identified by
amendment to Exhibit A to this Agreement. This Agreement shall not be
superseded by any provisions of the documents for construction and may be
amended only by written instrument signed by both Owner and Contractor.
1.3 The Project is the total construction to be designed and constructed of
which the work is a part. The Work comprises the completed construction
required by the Drawings and Specifications. The term day shall mean calendar
day unless otherwise specifically designated.
1.4 DEFINITIONS. For all purposes of this Agreement, except as otherwise
expressly provided or unless the context otherwise requires, the following terms
shall have the following meanings:
1.4.1 Agreement: The term "Agreement" has the meaning set forth in the
----------
preamble.
1.4.2 Approved Subcontractor: Any Subcontractor listed on Schedule H or
-----------------------
otherwise approved by Owner in writing.
1.4.3 Business Day: Any Day on which commercial banks are not authorized or
-------------
required to close in the State of Wyoming or the State of Idaho.
- 5 -
<PAGE>
1.4.4 Contractor: The term "Contractor" has the meaning set forth in the
-----------
preamble.
1.4.5 Day: A "Day" or "day" is a calendar day.
----
1.4.6 Dollar or "$": United States dollars.
--------------
1.4.7 Drawings and Specifications: Drawings and Specifications either (i)
----------------------------
prepared by the Contractor or its Subcontractors with respect to the work as
submitted to Owner under this Agreement, or (ii) included as part of Exhibit A.
1.4.8 Equipment: All materials, supplies, apparatus, machinery, parts,
----------
special maintenance tools, components, appliances and appurtenances thereto (a)
required for prudent construction, Start-up and testing of and operation of the
Facility in accordance with this agreement, or (b) to the extent they are
described in or required by the Work or the Drawings and Specifications.
1.4.9 Existing Facility: The Series "C" K-Fuel facility constructed
------------------
pursuant to that certain Turnkey Design and Construction Agreement entered into
as of August 21, 1995 between KFX Fuel Partners, L.P. and Walsh Construction
Company, a division of Guy F. Atkinson Company.
1.4.10 Facility: The complete 640,000 ton per year (design capacity)
---------
subbituminous coal benefication plant which is expected to have an annual
throughput capacity of 750,000 tons and is to be designed, procured,
constructed, tested and started-up under this Agreement, together with all
supporting improvements and interconnections, as more fully described in Exhibit
A.
1.4.11 Good Engineering Practices: Those practices, methods, equipment,
---------------------------
specifications and standards of safety and performance utilizing good, safe and
prudent engineering practices in connection with the design, construction,
operation, maintenance, repair and use in similar facilities.
1.4.12 Government Approval: Any authorization, consent, approval, license,
---------------------
lease, ruling, permit, tariff, rate, certification, exemption, filing, variance,
order, judgment, decree, publication, notices to, declarations of or with or
registration by or with any Government Authority relating to the acquisition,
ownership, construction, operation or maintenance of the Facility or to the
execution, delivery or performance of this Agreement.
1.4.13 Government Authority: Any Federal, national, state, municipal, local,
---------------------
territorial, or other governmental department, commission, board, bureau, agency
regulatory authority, instrumentality, judicial or administrative body, domestic
or foreign.
- 6 -
<PAGE>
1.4.14 Law: The term "Law" shall mean (a) any statute, law, rule, regulation,
---
code, ordinance, judgment, decree, writ, order, concession, grant, franchise,
license, agreement, directive, guideline, policy, requirement, or other
governmental restriction or any similar form of decision of or determination by,
or any interpretation or administration of any of the foregoing by, any
Government Authority, whether now or hereafter in effect or (b) any requirements
or conditions on or with respect to the issuance, maintenance or renewal of any
Government Approval or applications therefore whether now or hereafter in
effect.
1.4.15 Lender: Any bank, financial institution or other institutional
-------
investor providing financing under a Loan Agreement and any trustee or agent
acting on any such Person's behalf.
1.4.16 Loan Agreement: Any credit agreement, note purchase agreement, bond
---------------
indenture, lease agreement, equity contribution agreement, or other document or
documents pursuant to which Owner obtains financing for the acquisition,
development, construction, construction loan retirement, modification, repair,
or operation of the Facility or any refinancing of any thereof.
1.4.17 Owner: The term "Owner" has the meaning set forth in the preamble.
------
1.4.18 Permits, Licenses and Government Approvals: Any authorization,
-------------------------------------------
consent, approval, license, lease, ruling, permit, tariff, rate, certification,
exemption, filing, variance, order, judgment, decree, publication, notices to,
declarations of or with or registration by or with any Government Authority
relating to the acquisition, ownership, construction, operation or maintenance
of the Facility or to the execution, delivery or performance of this Agreement.
1.4.19 Progress Report: The report submitted by Contractor to Owner in
----------------
accordance with Article 8.
1.4.20 Project Schedule: The Project Schedule attached hereto as Exhibit B.
----------------
1.4.21 Site: The term "Site" shall mean the site in Section 32, Township 51
-----
North, Range 71 West, 6th P. M., Campbell County, Wyoming, as more specifically
located on Drawing No. 1001-2, "Proposed Site Plan", KFX Fuel Partners II, L.P.
(Yanke Energy, Inc. 10/25/96).
1.4.22 Subcontract: A subcontract entered into between Contractor and any
------------
Subcontractor.
1.4.23 Subcontractor: Any person other than Contractor performing any portion
--------------
of the Work, whether hired directly by Contractor or by a person hired by
Contractor and including every
- 7 -
<PAGE>
tier of subcontractor, sub-subcontractors and so forth, and any person providing
or supplying all or a portion of the Equipment required by any person performing
any portion of the Work to perform the Work, whether or not incorporated into
the Facility, including, without limitation, any materialman or vendor.
1.4.24 Work: All acts or action required for the design, procurement,
-----
engineering and construction of the Facility to final completion and for the
performance of Contractor's warranty obligations, including, but not limited to,
(i) engineering and construction of the Facility in conformance with applicable
Laws and Government Approvals, (ii) obtaining or assisting owner in acquiring
all Permits, Licenses and Government Approvals for the Facility in accordance
with Exhibit E, (iii) procurement and handling of materials, start-up and
testing of the Facility, (iv) supply and installation of the Equipment, (v)
performance of the purchase order work, (vi) construction management, and (vii)
all other acts as may be necessary to provide Owner with a fully operational
Facility, but excluding the items set forth in Phase 1 and 2 under Section
2.1.1.
ARTICLE 2
CONTRACTOR'S RESPONSIBILITIES
2.1 CONTRACTOR'S SERVICES
2.1.1 The Contractor shall be responsible for furnishing the Design,
including the Drawings and Specifications, and construction of the Project. The
Contractor and Owner have developed a Project Schedule, attached hereto and
incorporated by reference as Exhibit B, and the Owner shall be responsible for
prompt decisions and approvals so as to maintain the Project Schedule. Any
design, engineering, architectural, other professional service, or construction
service required to be performed under this Agreement shall be performed by duly
licensed personnel or entities.
2.1.2 Contractor's services hereunder shall consist of three phases. PHASE
1-Development Engineering: The Contractor shall prepare Design Development
documents to fix the cost, size and character of the Project as to structural,
mechanical and electrical systems, materials and other appropriate essential
items in the Project. These Development Documents are the basis for the design
and construction of the Project. PHASE 2-Detailed Engineering: From approved
Design Development Documents, the Contractor shall prepare working Drawings and
Specifications setting forth in detail the requirements and cost for the
construction of the Project, and based upon codes, laws or regulations in effect
at the time of their preparation. PHASE 3-Construction: The Contractor shall
engineer, procure and construct the Project pursuant to approved Drawings and
Specifications.
- 8 -
<PAGE>
Contractor shall proceed with each phase only upon receipt from Owner of a
written notice to proceed.
2.1.3 The Contractor and the Owner will work closely together to monitor the
design in accordance with prior approvals so as to ensure that the Project can
be constructed within the Guaranteed Maximum as defined in Article 6. As these
working Drawings and Specifications are being completed, the Contractor will
keep the Owner advised of the effects of any Owner requested changes on the
Project Schedule and/or the Guaranteed Maximum. Construction of the Project
shall be in accordance with these Drawings and Specifications as approved by the
Owner. The Drawings and Specifications are the property of the Owner and are
not to be used by the Contractor on this or other projects without the written
consent of the Owner.
2.1.4 After the completion of each of Phase 1 and 2 as set forth in Article
2.1.2, if the Project is no longer feasible from the standpoint of the Owner,
the Owner may terminate this Agreement and pay the Contractor pursuant to
Article 6 through the date of termination. The Project is no longer feasible
only if, in the exercise of Owner's prudent business judgment, Owner determines
that: (i) the Permits, Licenses and Governmental Approvals, attached hereto and
incorporated by reference as Exhibit E, necessary to construct the Project will
not be timely granted so as to achieve Start-up by April 1, 1998 and/or
Commercial Operation by June 1, 1998; or (ii) adequate commitments for equity
and/or debt financing have not been received by April 1, 1997. Owner shall
immediately notify Contractor of termination pursuant to this Article 2.1.4.
Contractor shall not commence work on the next succeeding phase except upon
receipt of a Notice to Proceed from Owner.
2.1.5 The Contractor and the Owner will assist the other in securing
authorizations necessary for the construction of the Project. Exhibit E is a
preliminary list, and Owner and Contractor will diligently identify and apply
for all applicable permits, licenses and government approvals. Permits,
Licenses and Government Approvals, Exhibit E, identifies the party responsible
for timely acquiring the same in the column labeled "Responsible Party":
Contractor is identified as "Yanke" and Owner is identified as "KFP."
2.2 RESPONSIBILITIES WITH RESPECT TO CONSTRUCTION
2.2.1 The Contractor will provide all construction supervision, inspection,
labor, materials, tools, construction equipment and subcontracted items
necessary for the execution and completion of the Project.
2.2.2 The Contractor will pay all sales, use, gross receipts and similar
taxes related to the Work provided by the Contractor
- 9 -
<PAGE>
which have been legally enacted at the time of execution of this Agreement and
for which the Contractor is liable.
2.2.3 The Project Schedule, attached hereto and incorporated by reference as
Exhibit B, indicates the dates for the starting and completion of the various
stages of the design and construction. With the Owner's consent, it shall be
revised as required by the conditions of the Work and those conditions and
events which are beyond the Contractor's control; provided, however, that in no
event may the dates for Start-up or Commercial Operation be moved to a later
date.
2.2.4 The Contractor shall at all times keep the premises free from the
accumulation of waste materials or rubbish caused by his operations. At the
completion of the Work, he shall remove all of his waste material and rubbish
from and around the Project as well as all his tools, construction equipment,
machinery and surplus materials.
2.2.5 The Contractor will give all notices and comply with all laws and
ordinances legally enacted at the date of execution of the Agreement, which
govern the proper execution of the Work.
2.2.6 The Contractor shall take necessary precautions for the safety of his
employees and the employees of all of Contractor's employees on the Work, and
shall comply with all applicable provisions of federal, state and municipal
safety laws to prevent accidents or injury to persons on, about or adjacent to
the Project site. He shall erect and properly maintain, at all times, as
required by the conditions and progress of Work, necessary safeguards for the
protection of workmen and the public. It is understood and agreed, however, that
the Contractor shall have no responsibility for the elimination or abatement of
safety hazards created or otherwise resulting from Work at the job site carried
on by other persons or firms directly employed by the Owner as separate
contractors, and the Owner agrees to cause any such separate contractors to
abide by and fully adhere to all applicable provisions of federal, state and
municipal safety laws and regulations and to comply with all reasonable
requests and directions of the Contractor for the elimination or abatement of
any such safety hazards at the job site.
2.2.7 The Contractor shall keep such full and detailed accounts as may be
necessary for proper financial management under this Agreement. The system
shall be satisfactory to the Owner, who shall be afforded access to all the
Contractor's records, books, correspondence, instructions, drawings, receipts,
vouchers, memoranda and similar data relating to this Agreement. The Contractor
shall preserve all such records for a period of three years after the final
payment or longer where required by law.
2.3. ROYALTIES AND PATENTS
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2.3.1 The Contractor shall pay all royalties and license fees for materials,
methods and systems incorporated in the work. He shall defend all suits or
claims for infringement of any patent rights and shall save the Owner harmless
from loss on account thereof except when a particular design, process or product
is specified by the Owner. In such case the Contractor shall be responsible for
such loss only if he has reason to believe that the design, process or product
so specified is an infringement of a patent, and fails to give such information
promptly to the Owner. Provided, however, that the Owner, at its cost, shall
acquire the right to use the Koppleman Series "C" K-Fuel technology for the
Project.
2.4 WARRANTIES AND COMPLETION
2.4.1 The Contractor warrants to the Owner that all materials and equipment
furnished under this Agreement will be new, unless otherwise specified and
agreed to by Owner and Contractor, and that all Work will be of good quality,
free from improper workmanship and defective materials and in conformance with
the Drawings and Specifications. The Contractor agrees to correct all Work
performed by him under this Agreement which proves to be defective in material
and workmanship within a period of one year from the Date of Substantial
Completion as defined in Paragraph 5.2, or for such longer periods of times as
may be set forth with respect to specific warranties contained in the
Specifications. This warranty is expressly in lieu of all other rights and
remedies at law or in equity.
2.4.2 The Contractor will secure required certificates of inspection,
testing or approval and deliver them to the Owner.
2.4.3 The Contractor will collect all written warranties and equipment
manuals and deliver them to the Owner.
2.4.4 The Contractor, with the assistance of the Owner's maintenance
personnel, will direct the checkout of utilities and operations of systems and
equipment for readiness, and will assist in their initial start-up and testing.
2.4.5 The Contractor shall provide the insurance for the Project as provided
in Paragraph 9.4
2.4.6 Except for the performance bond as provided for in article 9.3.1, the
Contractor shall bear the costs of any bonds that may be required.
2.4.7 Services related to investigation, appraisals or evaluations of
existing conditions, facilities or equipment, or
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verification of the accuracy of existing drawings or other Owner-furnished
information.
2.5 ADDITIONAL SERVICES
2.5.1 The Contractor will provide the following additional services upon the
request of the Owner. A written agreement between the Owner and Contractor
shall define the extent of such additional services and the amount and manner in
which the Contractor will be compensated for such additional services.
2.5.2 Obtaining and training maintenance personnel or negotiating
maintenance service contracts.
ARTICLE 3
OWNER'S RESPONSIBILITIES
3.1 The Owner shall provide full information regarding his requirements
for the Project.
3.2 The Owner shall designate a representative who shall be fully
acquainted with the Project, and has authority to approve changes in the scope
of the Project, render decisions promptly and furnish information expeditiously
and in time to meet the dates set forth in Subparagraph 2.2.3.
3.3 The Owner shall furnish for the site of the Project all necessary
surveys describing the physical characteristics, soils reports and subsurface
investigations, legal limitations, utility locations, and a legal description.
3.4 The Owner shall secure and pay for all necessary approvals, easements,
assessments and charges required for the construction, use, or occupancy of
permanent structures or for permanent changes in existing facilities.
3.5 The Owner shall furnish such legal services as may be necessary for
providing the items set forth in Paragraph 3.4, and such auditing services as he
may require.
3.6 If the Owner becomes aware of any fault or defect in the Project or
non-conformance with the Drawings or Specifications, he shall give prompt
written notice thereof to the Contractor.
3.7 The services and information required by the above paragraphs shall be
furnished with reasonable promptness at the Owner's expense and the Contractor
shall be entitled to rely upon the accuracy and the completeness thereof.
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3.8 The Owner shall have no contractual obligation to the Contractor's
Subcontractors and shall communicate with such Subcontractors only through the
Contractor.
ARTICLE 4
SUBCONTRACTS
4.1 All portions of the Project that the Contractor does not perform with
his own forces shall be performed under subcontracts. Contractor shall not
subcontract any design or engineering portion of the Project without the
express, prior written approval of the Owner.
4.2 A Subcontractor is a person or entity who has a direct contract with
the Contractor to perform any Work in connection with the Project; except it is
understood and agreed that the Owner is an intended third party beneficiary of
all contracts with design professionals, construction and other subcontractors,
purchase orders, and other agreements between the Contractor and third parties.
The Contractor shall incorporate the obligations of this Agreement with the
Owner in its respective contracts with design professionals, construction and
other subcontractors, supply agreements, purchase orders and other agreements.
The term Subcontractor does not include any separate contractor employed by the
Owner.
4.3 No contractual relationship shall exist between the Owner and any
Subcontractor. The Contractor shall be responsible for the management of the
Subcontractors in the performance of their Work.
ARTICLE 5
CONTRACT TIME SCHEDULE
5.1 The Project to be designed and constructed and the Work to be
performed under this Agreement shall be commenced on or about December 30, 1996
and shall be substantially completed no later than April 1, 1998 ("Date of
Substantial Completion" or "Start-up"). The Project and Work to be performed
under this Agreement shall be completed so as to allow Owner to commence
commercial operation of the Project on or before June 1, 1998 ("Final Completion
Date").
5.2 The portion of the Project to be performed under Phase 1 of this
Agreement is anticipated to commence on December 30, 1996 and be completed on or
before February 28, 1997. The portion of the Project to be performed under
Phase 2 of this Agreement is anticipated to commence on or about March 1, 1997
and to be completed on or about May 30, 1997. In order to meet the Date of
Substantial Completion and the Final Completion Date, the Work to be performed
under Phase 3 of this Agreement relating to procurement and site work is
anticipated to commence on or about
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April 1, 1997, and relating to erection-civil to commence on or about June 1,
1997. For that purpose and with respect to Phase 3, Owner may give Contractor a
limited Notice to Proceed with all or part of procurement, site work and
erection-civil, provided that Owner's power to terminate this Agreement pursuant
to Article 2.1.4 shall continue until completion of Phase 2.
5.2 The Date of Substantial Completion of Phase 3 of the Project is the
date when construction is sufficiently complete in accordance with the Drawings
and Specifications so the Owner can occupy or utilize the Project for the use
for which it is intended. Warranties called for by this agreement or by the
Drawings and Specifications shall commence on the Date of Substantial Completion
of the Project. This date shall be established by a Certificate of Substantial
Completion signed by the Owner and Contractor and shall state their respective
responsibilities for security, maintenance, heat, utilities, damage to the Work
and insurance. This Certificate shall also list the items to be completed or
corrected and fix the time for their completion and correction.
ARTICLE 6
FEES FOR DEVELOPMENT AND DETAILED ENGINEERING
COST-PLUS PERCENTAGE BASIS PRICE FOR CONSTRUCTION
6.1 Owner shall pay to Contractor for the services that Contractor is to
perform under Phases 1 and 2 of this Agreement pursuant to the Design and
Engineering Fee Schedule, attached hereto and incorporated by reference as
Exhibit C. Such payments shall be due and payable on the request of Contractor,
as evidenced by statements of Contractor, submitted pursuant to and subject to
the provisions of Article 8 of this Agreement. Contractor agrees that the total
payments to be billed and payable under this Article 6.1 for Phase 1 shall not
exceed One Hundred and Fifty Thousand Dollars ($150,000.00), and for Phase 2
shall not exceed Six Hundred Thousand Dollars ($600,000.00).
6.2 Owner shall pay to Contractor for the services that Contractor is to
perform under Phase 3 of this Agreement, a fee equal to ten percent (10%) of the
total gross cost of the Work that, with such total gross cost, shall be due and
payable on the request of Contractor, as evidenced by statements of Contractor,
submitted pursuant to and subject to the provisions of Article 8 of this
Agreement.
6.3 Contractor guarantees that the total cost of the Project under Articles 6.1
and 6.2 shall not exceed the sum of Sixty Million Dollars ($60,000,000.00)
(hereinafter "Guaranteed Maximum"). Should the total cost of the Project exceed
the Guaranteed Maximum, all such excess shall be borne by the Contractor.
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6.3 Upon the completion of Phase 2, Contractor shall submit in writing to
Owner a fixed, lump-sum price to complete the Project. Within ten business days
of receipt of the fixed, lump-sum price from Contractor, Owner shall notify
Contractor in writing of its acceptance or rejection of the fixed, lump-sum
price. If the Owner rejects the fixed, lump-sum price, the Contractor shall
complete the Project under the cost-plus subject to a maximum price provisions
of this Agreement. If the Owner accepts the fixed, lump-sum price, Contractor
and Owner shall adjust such price to reflect the Work completed to the date of
acceptance, and Contractor shall complete the Project pursuant to the terms of
this Agreement for the fixed, lump-sum price.
6.4 The Guaranteed Maximum will be modified for Changes in the Project
pursuant to Article 7.
6.5 For purposes of Article 6.2, the total gross cost of the Work shall
consist of the entire actual cost to Contractor of accomplishing the Work and
shall include the following:
6.5.1 Salaries and wages of all labor, including services of superintendent,
assistant superintendents, field engineers, job supervisors, clerks, security
personnel, truck drivers, mechanics, laborers, and all others necessary for the
proper conduct of the work and for the time employed on the work, together with
any social security and unemployment insurance taxes in connection with such
labor.
6.5.2 Disbursements made and obligations incurred for, or in connection
with, the furnishing, delivery, and installation of all materials, structural
accessories, machinery, equipment, and other items required to be furnished and
done under and pursuant to this Agreement; also, for and in connection with the
construction equipment and maintenance of temporary office or other work
structures for Contractor and Owner, at the Site of the Work and elsewhere as
required; for providing storage facilities away from the Site, if required; and
for or in connection with all insurance, bonds, fees, royalties, and permits.
6.5.3 Disbursements made and obligations incurred pursuant to subcontracts
made and entered into under and pursuant to this Agreement, less all
countercharges collected or due from subcontractors.
6.5.4 All loading and unloading, demurrage, express, freight, and delivery
charges, including those on construction equipment and tools to and from the
Site; cost of assembling, directing, moving, and dismantling construction
equipment; cost of fuel, power, power, light, and water used during
construction; custom duties on materials, drawings or Contractor's equipment;
cost of all telephone, telecopy, and similar charges incurred by Contractor at
the Site in connection with the Work; cost of progress photographs
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and negatives; cost of temporary fences, guardrails, and scaffolds; rental
charges of necessary machinery and equipment, whether such machinery and
equipment is owned by Contractor or shall be rented from others, for such time
as it is in actual use on the Work. The rate of such rentals including freight
and delivery costs, and all operating expenses, except labor, shall be approved
by Owner before commitments are made and shall in no event be higher than the
standard of rates paid in the locality for similar equipment.
6.5.5 Disbursements for materials or supplies furnished from Contractor's stock
which shall be charged to the Work at a fair market price as determined by
Contractor and approved in advance in writing by Owner.
6.5.6 Such travel and living expenses of Contractor's employees as may be
necessary and approved in advance in writing by Owner.
6.6 For purposes of Article 6.2, the term "total gross cost of the Work"
shall not include:
6.6.1 Salaries of Contractor's executive officers.
6.6.2 Salaries of any person employed during the execution of the Work in the
main or any branch office of Contractor whose time is devoted to the general
conduct of Contractor's business, such as supervisors, secretaries, plan clerks,
file clerks, checkers, drafter, and other such persons.
6.6.3 Cost of capital employed or money borrowed.
6.6.4 Overhead or general expense of any kind, except any such specifically
mentioned elsewhere in this Agreement.
6.6.5 Services and expenses of Contractor's home office estimating, purchasing,
and cost and accounting departments.
6.6.5 Costs incurred by Contractor due to any error, fault, or negligence on
the part of Contractor, its subcontractors, agents, or employees, or due to
their failure to comply in all respects with the provisions of this Agreement
and with the Drawings and Specifications.
6.6.6 Materials or supplies furnished from Owner's stock.
6.6.7 Overtime work of Contractor's employees or employees of Contractor's
subcontractors unless specifically agreed upon by Owner prior to the performance
of the overtime work.
6.7 For purposes of Article 6.2, the following items shall be credited to the
"total gross cost of the Work":
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6.7.1 Proceeds of sale of all surplus materials, construction equipment, and
temporary structures that have been charged to the Work otherwise than by way of
rental, and remaining after completion, whether such sale is made to Owner,
Contractor or some other party. All such materials shall be sold by Contractor,
at prices approved by Owner.
6.7.2 Discounts earned by Contractor through advance or prompt payments,
Contractor to obtain all possible trade and time discounts on bills for
materials furnished and pay such bills within the discount periods; Contractor
to purchase in such quantities as will provide the most advantageous price to
Owner.
6.7.3 Reasonable market value, as certified by Owner at the time of removal, of
all material, tools, and equipment actually used on the Work and on completion
of the Work retained by Contractor.
6.7.4 The full amount of deposits made and charged against the Work.
6.7.5 Rebates, discounts, or commissions allowed to or collected by Contractor
from suppliers of materials, together with all other refunds, returns, or
credits received for return of materials or any bond premiums, insurance, state
of local taxes, or otherwise. Any insurance dividends or other credits to be
received after settlement shall be assigned to Owner.
ARTICLE 7
CHANGES IN THE PROJECT
7.1 The Owner, without invalidating this Agreement, may order Changes in
the Project within the general scope of this Agreement consisting of additions,
deletions or other revisions. Owner and Contractor specifically acknowledge
that design and operating experience with the Existing Facility are expected and
anticipated to result in Changes in the Project. The Guaranteed Maximum shall
be adjusted accordingly. All such Changes in the Project shall be authorized by
Change Order.
7.1.1 A Change Order is a written order to the Contractor signed by the Owner
or his authorized agent and issued after the execution of this Agreement,
authorizing a Change in the Project and/or an adjustment in the Guaranteed
Maximum or the Project Schedule.
7.1.2 In the event that Owner contemplates making a Change in the Project,
Owner shall advise Contractor of same and Owner and Contractor shall then
promptly consult (at Owner's expense) concerning the price and impact on the
Project Schedule of implementing the proposed change. In the event Owner has
notified Contractor of a contemplated change in the Project, Contractor shall
use its reasonable efforts to perform the Project in a manner
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that does not materially alter the scope or cost of or have a potential effect
on the schedule resulting from, any contemplated change in the Project during
the period of consultation regarding, and preparation of estimates relating to,
such contemplated change. Following such consultation, Owner may request and
Contractor shall thereupon promptly and as soon as is reasonably practicable
prepare (at Owner's expense) a detailed written estimate relating to the
contemplated change, including (i) solely with respect to a change requiring a
modification to the Project, the price of such change, (ii) the effect such
change could be expected to have on the Project Schedule (including, but not
limited to, the Substantial Completion Date and Final Completion Date) or any
other schedule, and (iii) the potential effect of such change on Contractor's
ability to comply with any of its obligations hereunder. Owner shall review this
estimate with Contractor for the purpose of determining whether to proceed with
such change in the Project and, if so, for the purpose of agreeing on the
matters set forth therein, including a mutually acceptable adjustment to the
Guaranteed Maximum and/or the Project Schedule, if any, if the proposed change
requires a modification of the Project. If the parties reach agreement on the
matters listed in the estimate, Owner shall issue a Change Order which reflects
the nature of such agreement. Contractor shall promptly adjust (subject to
Owner's approval) any affected portion of the Estimated Drawdown Schedule,
attached hereto and incorporated by reference as Exhibit D, and any other
schedules requiring adjustment to reflect the change agreed upon. In no event
shall Contractor undertake or be obliged to undertake a change in the Project
until it has received a Change Order signed by Owner.
7.1.3 Except as otherwise set forth herein, no change in the Project or request
relating to a contemplated change in the Project pursuant to this Article 7
shall affect the Substantial Completion Date or the Final Completion Date unless
specifically agreed to in writing by Owner. In the event Owner and Contractor
fail to agree on the impact of a proposed change in the Project on the
Substantial Completion Date or Final Completion Date, Owner may nevertheless
require Contractor to make such change, subject to Contractor's right to dispute
the impact of such change on such deadlines.
7.1.4 Owner shall have the right, upon written notice to Contractor, to require
that the Project be accelerated by means of overtime, additional crews or
additional shifts or resequencing, of the Project notwithstanding that the
Project is progressing without delay in accordance with the established Project
Schedule. Contractor agrees to use all reasonable efforts to perform such
acceleration, and Contractor shall be entitled to reimbursement of increased
cost (premium portion of overtime pay, additional crew, shift or equipment cost
and such other items of cost requested by Contractor and approved by Owner in
advance of any acceleration (which approval will not be unreasonably withheld).
Contractor
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shall promptly provide a plan for such acceleration, including his
recommendations for the most effective and economical acceleration.
7.1.5 If the Owner and the Contractor are unable to mutually agree on the
increase or decrease in the Guaranteed Maximum under 7.1.2 resulting from a
Change in the Project, the Contractor shall promptly proceed with the Work
required by the Change in the Project provided the Contractor receives a written
order to proceed signed by the Owner, and the change in the Guaranteed Maximum
shall be determined as follows: the change in the Guaranteed Maximum shall then
be determined on the basis of the reasonable costs of such Work and savings of
those performing the Work attributed to the Changes in the Project including the
percentage fee due Contractor. The amount of decrease in the Guaranteed Maximum
to be allowed by Contractor to the Owner for any deletion or Change in the
Project which results in a net decrease in cost will be the amount of the actual
net decrease only. When both increases and decreases in costs of the Work are
involved in any one Change in the Project, the increase in the percentage fee
due Contractor shall be figured on the basis of the net increase in costs, if
any. Under this Article 7, the Contractor shall keep and present, in such form
as the Owner may prescribe, an itemized accounting together with appropriate
supporting data of the effect on the Guaranteed Maximum. The increase or
decrease in the Guaranteed Maximum under this Article 7 shall be authorized by
Change Order signed by the Owner or its authorized agent.
7.1.6 Should concealed conditions encountered in the performance of the Work
below the surface of the ground or should concealed or unknown conditions in an
existing structure be at variance with the conditions indicated by the Drawings,
Specifications, or Owner-furnished information or should unknown physical
conditions below the surface of the ground or should concealed or unknown
conditions in an existing structure of an unusual nature, differing materially
from those ordinarily encountered and generally recognized as inherent in work
of the character provided for in this Agreement, be encountered, the Guaranteed
Maximum shall be equitably adjusted by Change Order upon claim by either party
made within a reasonable time after the first observance of the conditions.
7.2 MINOR CHANGES IN THE PROJECT
7.2.1 The Owner will have authority to order minor changes in the Project
not involving an adjustment in the Guaranteed Maximum or an extension of the
Project Schedule and not inconsistent with the intent of the Drawings and
Specifications. Such changes may be effected by written order and shall be
binding on the Owner and the Contractor.
7.3 EMERGENCIES
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7.3.1 In any emergency affecting the safety of persons or property, the
Contractor shall act, at its discretion to prevent threatened damage, injury or
loss. Any increase in the Guaranteed Maximum claimed by the Contractor on
account of emergency work shall be determined as provided in this Article.
ARTICLE 8
PAYMENTS TO THE CONTRACTOR
8.1 Payments shall be made by the Owner to the Contractor according to the
following procedure:
8.1.1 On or before the tenth (10th) day of each month, Contractor shall submit
to Owner for its approval a Request for Payment. Each Request for Payment shall
set forth (a) Work performed, (b) equipment purchased by the Contractor and
delivered to the Site, or stored during the previous month, (c) progress
payments to equipment vendors for off-site engineering and fabrication; and (d)
the percentage fee due Contractor. Each such application shall be for an amount
equal to the total cost of the Work performed and equipment delivered to the
Site as of the date of such Request for Payment (or, in the case of such portion
of the Request for Payment related to progress payments to subcontractors, an
estimate of the total cost of the Work per formed and equipment delivered
relating to such progress payments), less all previous payments, and shall
include such supportive documentation as Owner may reasonably require. Each
Request for Payment shall be accompanied by partial lien waivers of the
Contractor, and for each subcontractor attributable to the Work covered by the
previous payment.
8.1.2 No progress payment, nor any partial or entire use of the Work by Owner,
shall constitute an acceptance of any Work. Title to all equipment and
materials shall pass to Owner upon the date payment is made to Contractor
without regard to any retainage withheld by Owner; Contractor, however, shall
retain care, custody and control of the same and exercise due care with respect
thereto until the earlier of the Substantial Completion Date or the termination
of this Agreement. Said transfer of title shall in no way affect Owner's rights
as set forth in other provisions of this Agreement.
8.1.3 In each Request for Payment, Contractor shall certify that such Request
for Payment represents the amount to which Contractor is entitled pursuant to
the terms of this Agreement and shall also certify as follows: There are no
known, or, to Contractor's knowledge, pending or threatened mechanics, or
materialmen's liens or other such claims or encumbrances outstanding at the date
of this Request for Payment (except as described below), all due and payable
bills with respect to the Work have been paid to date or are included in the
amount requested in the current application, and, except for such bills not
paid but so included, there is no
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known basis for the filing of any mechanics, or materialmen's liens on the
Project or the Work (except as described below) and releases from all
subcontractors have been obtained in such form as to constitute an effective
release of lien (corresponding to payments received by them) under the laws of
the State of Wyoming.
8.1.4 Contractor shall furnish with each Request for Payment a waiver and
release of liens and security interest to the extent of the payment received by
Contractor in respect of the immediately preceding Request for Payment in the
form of Exhibit G hereto for itself and, beginning with the second Request for
Payment, for each of its subcontractors together with any other such forms or
documents as required by Owner or Owner's title insurer in order to assure an
effective release of mechanics' or materialmen's liens and all other claims or
encumbrances, legal or equitable for such previous payments, or for any Work
performed under this Agreement, in compliance with the laws of the State of
Wyoming.
8.1.5 Contractor shall submit as part of each Request for Payment a monthly
progress report (a "Progress Report") in the form set forth in Exhibit F.
8.1.6 Owner shall review each such Request for Payment and may make such
exceptions as it deems necessary or appropriate under the circumstances. Owner
shall not be required to make payment in respect of any portion of the Request
for Payment which Owner reasonably believes has not been properly submitted in
accordance with this Agreement. In no event shall Owner be required to make
payment for items reasonably disallowed by Owner pursuant to the terms of this
Agreement. Twenty-five (25) Days after receipt of a Request for Payment and
supporting documentation in the manner and detail and at the time herein
required, either Owner shall make payment to Contractor of undisputed amounts,
subject to Section 8.1.10 hereof, or Owner shall notify Contractor that it
disputes all or a portion of such Request for Payment. Owner shall have a right
of set off against any undisputed amounts payable to Contractor. The payment of
any Request for Payment by owner, including the Final Request for Payment (as
hereinafter defined), does not constitute approval or acceptance of any item of
cost in such Request for Payment. If Owner improperly withholds any amount,
payment of such amount shall be made by Owner no later than ten (10) days after
determination that such amount was improperly withheld, together with interest
on such amount at the "prime rate" as described in the Wall Street Journal from
the date such payment should have been made.
8.1.7 Each payment made pursuant to this Article 8 shall be paid directly to
Contractor. Such payment shall be wire-transferred to the following account for
the Contractor:
U.S. Bank
ABA # 123103729
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Yanke Energy, Inc.
Account No. 5707802343
or such other account as may be designated in writing by Contractor.
8.1.8 Contractor agrees that seven and one-half percent (72%) of the Cost of
the Work shall be retained (the "Retainage") by owner retaining from the last
payment(s) an amount sufficient to equal seven and one-half percent (72%) of the
Cost of the Work payable to Contractor. The Retainage will be held by Owner
until final payment ("Final Payment") is due from Owner to Contractor.
8.1.9 Within 25 days after the Final Completion Date and receipt by Owner of a
final Progress Report and a final request for payment ("Final Request for
Payment") which shall set forth all amounts due and remaining unpaid to
Contractor, and approval thereof by Owner, Owner shall pay to Contractor the
amount due under such Final Request for Payment. Final Payment shall include
release of the remaining Retainage. The Final Request for Payment shall not be
made until Contractor delivers to Owner a complete release of all liens arising
out of this Agreement and an affidavit that so far as Contractor has knowledge
or information the release includes and covers all portions of the Work for
which a lien could be filed, but Contractor may instead furnish a bond
satisfactory to owner to indemnify owner against any lien.
8.1.10 Any provision hereof to the contrary notwithstanding, upon the
occurrence and continuance of any of the following events, Owner, upon notice to
Contractor, may withhold or retain such portion (including all) of any payment
due to Contractor under this Agreement as reasonably necessary to insure the
performance of the work or to protect fully Owner's rights hereunder:
8.1.10.1 A default by Contractor has occurred and the grace period
applicable thereto, if any, shall have expired;
8.1.10.2 Contractor has failed to make prompt payments to its
subcontractors for material or labor used in the Work for which Owner
has made payment to Contractor and such failure is not the subject of a
bona fide dispute;
8.1.10.3 Any lien shall be filed against the Project, the Work or any
portion thereof or any equipment or any materials encompassed therein
for which the Contractor is responsible and such lien shall remain
undischarged (and Contractor shall not have provided a bond); or
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8.1.10.4 Owner in good faith determines that Contractor cannot with
prompt and reasonable acceleration of the Work meet the Substantial
Completion Date.
8.1.11 Acceptance by Contractor of the Final Payment shall constitute a release
of Owner, its successors and assigns and every officer and agent thereof from
all liens (whether statutory or otherwise and including mechanics, or suppliers,
liens), claims and liability hereunder with respect to the Project or any Work
performed or furnished in connection with this Agreement, or for any act or
omission of Owner or of any person relating to or affecting this Agreement,
except for any claims which are (i) the subject of an action filed by Contractor
or (ii) the subject of a written request for resolution delivered by Contractor
prior to the Final Payment containing reasonable details regarding such dispute.
No payment by Owner shall be deemed a waiver by Owner of any obligation of
Contractor under this Agreement.
8.1.12 Contractor shall use the sums paid to it pursuant to this Article 8
solely for the purpose of the Project and performing the Work. No provision
hereof shall be construed, however, to require or permit Owner to see to the
proper disposition or application of the monies so paid to Contractor.
8.1.13 It is understood and agreed by Contractor and Owner that any Request for
Payment which is nonconforming, incomplete or inaccurate or which lacks the
detail, specificity or supporting documentation required by this shall not, to
the extent of such deficiency, constitute a valid and proper Request for
Payment, and Owner shall not have any obligation to make payment of amounts in
respect of which such Request for Payment was deficient until Contractor shall
have resubmitted said Request for Payment, to the extent of such deficiency, in
proper form.
8.2 Contractor, for itself and other parties acting through or under it does
hereby agree with Owner that no mechanics, lien or other claim or encumbrance in
the nature of a lien shall be maintained against the Work or the Project or any
part or parts thereof or the appurtenances thereto, by Contractor or by any
subcontractor, for work done or for any tools, equipment, materials or
supervision or other services furnished under this Agreement for which Owner has
made payment to Contractor.
8.3 To the extent Contractor has received payment with respect to the Work or
the Project, Contractor shall indemnify and hold harmless Owner and defend Owner
from any and all liens filed in connection therewith (other than liens filed due
to Owner's wrongful failure to make undisputed payments under this Agreement),
including all expenses and attorneys' fees incurred in discharging any liens or
similar encumbrances filed by Contractor or any of its subcontractors. If
Contractor shall default in discharging any lien upon the Project, the Work or
any portion thereof, or any
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equipment or materials encompassed therein, Contractor shall promptly notify
Owner in writing and Contractor shall then satisfy or discharge any such lien(s)
(provided that Contractor shall have the right to submit a bond reasonably
satisfactory to Owner, in the amount required by law, if Contractor, despite its
reasonable efforts, has been unable to obtain discharge thereof). If Contractor
either does not promptly satisfy or commence reasonable efforts to discharge
such lien(s) (or, where permitted, fails to provide Owner with a bond in lieu
thereof), Owner shall have the right, at its option, after prior written
notification to Contractor, to pay or discharge such lien(s) and Contractor
shall, within ten (10) days of request by Owner, reimburse Owner for all
reasonable out of pocket costs actually incurred by Owner to discharge such
lien(s), including administrative costs, attorneys' fees and other expenses.
8.4 In order to give Owner and each of its successors and assigns full power
and authority to protect itself and the Project against any and all claims filed
by Contractor, or by any subcontractor or anyone acting under or through
Contractor in violation of the foregoing covenant, Contractor, for itself, its
successors and assigns, and all such persons, hereby covenants to execute or
reexecute any agreement or instrument as Owner or its successors and assigns
shall reasonably request at no cost or expense to Owner or its successors and
assigns to evidence this waiver of liens and the agreements contained herein.
ARTICLE 9
INDEMNITY, INSURANCE, PERFORMANCE BOND
9.1 INDEMNITY
9.1.1 The Contractor agrees to indemnify and hold the Owner harmless from
all claims for bodily injury and property damage that may arise from the
Contractor's operations under this Agreement.
9.1.2 The Owner shall cause any other contractor who may have a contract
with the Owner to perform work in the areas where Work will be performed under
this Agreement, to agree to indemnify the Owner and the Contractor and hold them
harmless from all claims for bodily injury and property damage that may arise
from that contractor's operations. Such provisions shall be in a form
satisfactory to the Contractor.
9.2 INSURANCE
9.2.1 Owner and Contractor agree to obtain and maintain insurance as provided
in Insurance Requirements, attached hereto and incorporated by reference as
Exhibit I.
- 24 -
<PAGE>
9.3 PERFORMANCE BOND
9.3.1 If requested by Owner, Contractor shall furnish to Owner an unconditional
performance bond issued by a surety acceptable to Owner, and Contractor shall
furnish Owner legal opinions of Counsel to Contractor and certificates of
authorized officers of Contractor addressing matters reasonably requested by
Owner. The cost of the performance bond shall be reimbursed to Contractor by
Owner.
ARTICLE 10
TERMINATION OF THE AGREEMENT AND OWNER'S
RIGHT TO PERFORM CONTRACTOR'S OBLIGATIONS
10.1 TERMINATION BY THE CONTRACTOR
10.1.1 If the Project is stopped for a period of thirty (30) days under an
order of any court or other public authority having jurisdiction, or as a result
of an act of government, such as a declaration of a national emergency making
materials unavailable, through no act or fault of the Contractor or if the
Project should be stopped for a period of thirty (30) days by the Contractor for
the Owner's failure to make payment thereon, then the Contractor may, upon seven
days' written notice to the Owner, terminate this Agreement and recover from the
Owner payment for all Work executed, the percentage fee due Contractor earned to
date, and for any proven loss sustained upon any materials, equipment, tools,
construction equipment and machinery.
10.1.1 If the Owner is adjudged a bankrupt, or if it makes a general
assignment for the benefit of its creditors, or if a receiver is appointed on
account of its insolvency, then the Contractor may, upon seven days' written
notice to the Owner, terminate this Agreement and recover from the Owner payment
for all Work executed, the percentage fee due Contractor earned to date, and for
any proven loss sustained upon any materials, equipment, tools, construction
equipment and machinery.
10.2 OWNER'S RIGHT TO PERFORM CONTRACTOR'S OBLIGATIONS AND TERMINATION BY
THE OWNER FOR CAUSE
10.2.1 If the Contractor fails to perform any of its obligations under this
Agreement, including any obligation it assumes to perform Work with its own
forces, the Owner may, after seven days' written notice, during which period the
Contractor fails to perform such obligation, make good such deficiencies. The
Guaranteed Maximum shall be reduced by the cost to the Owner of making good such
deficiencies.
10.2.2 If the Contractor is adjudged a bankrupt, or if it makes a general
assignment for the benefit of its creditors, or if a receiver is appointed on
account of its insolvency, or if it
- 25 -
<PAGE>
persistently or repeatedly refuses or fails, except in cases for which extension
of time is provided, to supply enough properly skilled workmen or proper
materials, or if it fails to make proper payment to subcontractors or for
materials or labor, or persistently disregards laws, ordinances, rules,
regulations or orders of any public authority having jurisdiction, or otherwise
is guilty of a substantial violation of a provision of this Agreement, then the
Owner may, without prejudice to any right or remedy and after giving the
Contractor and its surety, if any, seven (7) days' written notice, during which
period the Contractor fails to cure the violation, terminate the employment of
the Contractor and take possession of the Site and of all materials, equipment,
tools, construction equipment and machinery thereon owned by the Contractor and
may finish the Work by whatever reasonable method Owner may deem expedient. In
such case, the Contractor shall not be entitled to receive any further payment
until the Work is finished nor shall Contractor be relieved from its obligations
assumed under Article 6.
10.3 TERMINATION BY OWNER UPON CHANGE IN CONTROL OF CONTRACTOR
10.3.1 If, during the term of this Agreement, the ownership of Contractor
significantly changes (more than twenty percent of voting control or rights to
distribution upon liquidation, or any combination thereof), Owner has the right
at its sole option to terminate this Agreement. If the Owner terminates the
Agreement pursuant to this paragraph, Owner shall pay the Contractor the total
of (a) Costs incurred by the Contractor in performing the Project, including
initial costs and preparatory expenses; (b) Costs incurred in settling and
paying termination claims under terminated subcontracts; (c) Accounting, legal,
clerical and other expenses incurred as a result of the termination; (d)
Storage, transportation, demobilization and other costs incurred for the
preservation, protection or disposition of material and equipment on the
Project; and (e) Any other necessary and reasonable costs incurred by the
Contractor as a result of the Owner's termination of this Agreement. In
calculating the amount due the Contractor under this clause, a deduction shall
be made for all payments to the Contractor under this Agreement.
ARTICLE 11
ASSIGNMENT AND GOVERNING LAW
11.1 Neither the Owner nor the Contractor shall assign its interest in
this Agreement without the written consent of the other except as to the
assignment of proceeds.
11.2 This Agreement shall be governed by the law of the State of Wyoming.
- 26 -
<PAGE>
PROPRIETARY INFORMATION; INVENTIONS AND LICENSES
12.1 CONFIDENTIAL TREATMENT OF PROPRIETARY INFORMATION
12.1.1 Any information concerning the parties hereto which is designated in
writing as proprietary and disclosed to the other party incident to the
performance of Work pursuant to this Agreement is disclosed in confidence, and
the transferees shall not publish or otherwise disclose such information to
third parties without the prior written approval of the transferor; provided,
--------
however, that nothing herein shall limit either party's right to disclose any
information provided by the other party hereunder which (i) was furnished by
such party prior to this Agreement without restrictions; (ii) was in the public
domain without fault or knowledge of the disclosing party prior to such
disclosure; or (iii) is received by either party from a third party without
restriction or breach of any duty of confidentiality and without breach of this
Agreement. Contractor shall require any subcontractors, employees or
consultants performing any portion of the work under this Agreement also to
comply with this requirement. Notwithstanding the foregoing, either party may
disclose any such information to the extent that such party is required by any
government authority to make such disclosure. In addition, Owner may disclose
such information to the extent that such disclosure is required by any lender,
prospective lender, lender's consultant, purchaser of any output from the
Project, supplier of natural gas to the Project, and any person providing any
interconnection services to the project, provided that such persons agree to
reasonable confidentiality restrictions.
12.2 INVENTIONS AND LICENSES
12.2.1 Contractor agrees to disclose promptly to Owner all Inventions. All
right, title and interest in and to such Inventions shall belong to Owner or its
designee. Contractor agrees to execute or have executed all documents, and to
perform or have performed all lawful acts that Owner may deem desirable or
necessary to perfect its or its designee's title thereto and to obtain and
maintain patent coverage thereon at the expense of Owner. Only for purposes of
the Project, Owner agrees to grant and hereby grants to Contractor an
irrevocable, royalty free, unrestricted, non-exclusive license with respect to
all Inventions.
12.2.2 For purposes of this Article 12.2, the term "Invention" means all
inventions which are based on or derived from proprietary information received
from Owner or first reduced to practice during the course of the Work by
Contractor and its employees or by any other subcontractors from whom Contractor
using reasonable efforts is able to obtain an agreement to assign such
inventions to Owner (but excluding inventions of such Persons not related to or
arising out of improvements to the K-Fuel Process).
- 27 -
<PAGE>
12.2.3 Contractor further agrees to grant and hereby grants to owner (and shall
procure for Owner from Subcontractors) an irrevocable, royalty-free,
unrestricted, nonexclusive license, under all patents now or during the term of
this Agreement owned or controlled by Contractor, which are necessary for the
construction, operation, maintenance, repair or alteration (other than
improvements affecting basic design) of the Facility or any unit or component
thereof designed, specified or constructed by Contractor under this Agreement
ARTICLE 13
ARBITRATION
13.1 AGREEMENT TO ARBITRATE: All claims, disputes and matters in question
arising out of, or relating to this Agreement or the breach thereof, except for
claims which have been waived by the making or acceptance of final payment, and
the claims described in Article 13.7, shall be decided by arbitration in
accordance with the Construction Industry Arbitration Rules of the American
Arbitration Association then in effect unless the parties mutually agree
otherwise. This agreement to arbitrate shall be specifically enforceable under
the prevailing arbitration law.
13.2 NOTICE OF DEMAND: Notice of the demand for arbitration shall be filed in
writing with the other party to this Agreement and with the American Arbitration
Association. The demand for arbitration shall be made within a reasonable time
after written notice of the claim, dispute or other matter in question has been
given, and in no event shall it be made after the date of final acceptance of
the Work by the Owner or when institution of legal or equitable proceedings
based on such claim, dispute or other matter in question would be barred by the
applicable statute of limitations, whichever shall first occur. The location of
the arbitration proceedings shall be Denver, Colorado, or such other location as
the parties may mutually agree.
13.3 AWARD: The award rendered by the arbitrator(s) shall be final and
judgment may be entered upon it in accordance with applicable law in any court
having jurisdiction.
13.4 WORK CONTINUATION AND PAYMENT: Unless otherwise agreed in writing, the
Contractor shall carry on the Work and maintain the Project Schedule pending
arbitration, and, if so, the Owner shall continue to make payments in accordance
with this Agreement.
13.5 NO LIMITATION OF RIGHTS OR REMEDIES: Nothing in this Article shall limit
any rights or remedies not expressly waived by the Contractor which the
Contractor may have under lien laws or payment bonds.
- 28 -
<PAGE>
13.6 SAME ARBITRATORS: To the maximum extent permitted by law, all claims
which are related to or dependent upon each other, shall be heard by the same
arbitrator or arbitrators even though the parties are not the same.
13.7 EXCEPTIONS: This agreement to arbitrate shall not apply to any claim of
contribution or indemnity asserted by one party to this Agreement against the
other party and arising out of any action brought in a state or federal court or
in arbitration by a person who is under no obligation to arbitrate the subject
matter of such action with either of the parties hereto. In any dispute arising
over the application of this Article 13.7, the question of arbitrability shall
be decided by the appropriate court and not by arbitration.
ARTICLE 14
MISCELLANEOUS
14.1 Further Assurances. Each of Owner and Contractor will use its best
------------------
efforts to implement the provisions of this Agreement, and for such purpose
each, at the request of the other, will, without further consideration, promptly
execute and deliver or cause to be executed and delivered to the other such
assistance, or assignments, consents or other instruments in addition to those
required by this Agreement, in form and substance satisfactory to the other, as
the other may reasonably deem necessary or desirable to implement any provision
of this Agreement or to arrange financing of the Project.
14.2 Record Retention. Contractor agrees to retain for a period of three (3)
----------------
years from the Final Completion Date all records relating to its performance of
the Work, and to cause all subcontractors engaged in connection with the Work
to retain for the same period all their records relating to the Work. During
such period, Owner shall have access to such records at reasonable times after
reasonable notice to Contractor. At the end of such period, Contractor will
offer such records to Owner.
14.3 No Waiver. No waiver of any of the terms and conditions of this Agreement
---------
shall be effective unless in writing and signed by the party against whom such
waiver is sought to be enforced. Any waiver of the terms hereof shall be
effective only in the specific instance and for the specific purpose given. The
failure of a party to insist, in any instance, on the strict performance of any
of the terms and conditions hereof shall not be construed as a waiver of such
party's right in the future to insist on such strict performance.
14.4 Severability. The invalidity or unenforceability, in whole or in part, of
------------
any portion or provision of this Agreement will not
- 29 -
<PAGE>
affect the validity and enforceability of any other portion or provision hereof.
Any invalid or unenforceable portion or provision shall be deemed severed from
this Agreement and the balance of the Agreement shall be construed and enforced
as if the Agreement did not contain such invalid or unenforceable portion or
provision.
14.5 Binding on Successors, Etc. This Agreement shall be binding on the
--------------------------
parties hereto and on their respective successors, heirs and assigns.
14.6 Survival of Representations, Warranties and Guarantees. All
------------------------------------------- ----------
representations, warranties, guarantees, covenants and agreements of the parties
herein shall survive the execution and delivery of this Agreement, and shall
terminate, if not earlier terminated pursuant to the express provisions of this
Agreement, three (3) years from the Final Completion Date.
14.7 No Oral Modifications. No oral or written modification of this Agreement
---------------------
by any officer, agent or employee of Contractor or Owner, either before or after
execution of this Agreement, shall be of any force or effect unless such
modification is in writing and is signed by the party to be bound thereby.
14.8 Headings for Convenience Only. The Table of Contents and headings of the
-----------------------------
various articles contained herein are not part of this Agreement and are
included solely for convenience of the parties.
14.9 Nondiscrimination. Contractor agrees that in the performance of its Work
-----------------
under this Agreement it will not knowingly violate any applicable laws
prohibiting discrimination in employment.
14.10 Counterpart Execution. This Agreement may be executed by the parties
---------------------
hereto in any number of counterparts (and by each of the parties hereto on
separate counterparts), each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute but one and the
same instrument.
14.11 Third Party Beneficiaries. Except as provided in Article 4.2, this
--------------------------
Agreement and each and every provision thereof are for the exclusive benefit of
the parties hereto and not for the benefit of any third party other than any
person or entity who purchases, leases, or takes a security interest in the
Project.
14.12 Order of Precedence/Intent of Contract. This Agreement consists of
--------------------------------------
Articles 1 through 14 hereof and all Exhibits hereto. Unless expressly stated
otherwise herein, in case of conflict between portions of this Agreement, the
order of precedence for conflict resolution in descending order shall be as
follows:
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<PAGE>
(1) Articles 1 through 14, as such sections may be amended in accordance
with the terms hereof;
(2) Exhibits of this Agreement; and
(3) Drawings and Specifications.
14.13 INDEPENDENT CONTRACTOR
14.13.1 General. Contractor is an independent contractor and nothing contained
-------
herein shall be construed as constituting any relationship with Owner other than
that of Owner and independent contractor, nor shall it be construed as creating
any relationship whatsoever between Owner and Contractor's employees. Neither
Contractor, nor any of its employees, are or shall be deemed to be employees of
Owner.
14.13.2 Employees. Contractor has sole authority and responsibility to employ,
---------
discharge and otherwise control its employees.
14.13.3 Responsibility for Subcontractors, Etc. Pursuant to the provisions of
--------------------------------------
this Agreement, Contractor accepts complete responsibility for the acts of its
agents and subcontractors and all others it hires to perform or assist in the
performance of the Work.
14.14 NOTICES AND COMMUNICATIONS
14.14.1 Requirements. Any notice, request, proposal for changes, and
------------
correspondence (including drawings, lists, schedules, instruction books,
statements or invoices) required or permitted under the terms and conditions of
this Agreement shall be in writing and (i) sent by facsimile, followed by
delivery as provided in any of the following manners; or (ii) delivered
personally; or (iii) sent by registered mail, return receipt requested; or (iv)
sent by a recognized overnight mail or courier service, with delivery receipt
requested, to the following addresses:
If to Contractor:
Yanke Energy, Inc.
4414 Gekeler Lane
Boise, Idaho 83705
Telephone: 208-338-2200
Facsimile: 208-338-2208
Attention: General Manager
If to Owner: KFX Fuel Partners II, L.P.
c/o KFX Wyoming, Inc.
1999 Broadway
Suite 3200
- 31 -
<PAGE>
Denver, Colorado 80202
Telephone: 303-293-2992
Facsimile: 303-293-8430
Attention: General Partner
14.14.2 Effective Time. Notices shall be effective when each of the required
--------------
copies is received by the intended recipient.
14.14.3 Technical Communications. Any communications pertaining to routine
------------------------
day-to-day matters pertaining to issues on the Site shall be between
Contractor's Representative and the Owner's Site Superintendent or other
representatives appointed by the parties. Contractor's Representative shall be
satisfactory to Owner, have knowledge of the Work and be available at all
reasonable times for consultation.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized representatives as of the day and year first
above written.
Owner: KFX Fuel Partners II, L.P.
By: KFX WYOMING, INC., a general
partner
By: /s/ R. G. Swenson
-----------------
Its: Secretary-Treasurer
-------------------
Contractor: Yanke Energy, Inc.
By: /s/ Sheldon Schultz
-------------------
Its: General Manager
---------------
- 32 -
<PAGE>
AMENDMENT TO AGREEMENT
This Amendment to Agreement entered into this 16/th/ day of January,
1997, between KFx Inc., a Delaware corporation ("KFx"), with offices at 1999
Broadway, Suite 3200, Denver, Colorado 80202; K-Fuel LLC, a Delaware limited
liability company, with offices at 1999 Broadway, Suite 3200, Denver, Colorado
80202; and RCD Development, a joint venture partnership ("RCD"), with offices at
5007 Baltimore Avenue, Bethesda, Maryland 20816, whose partners are HB Capital,
Inc., a Delaware corporation ("HBC"), with offices at 77 Franklin Street,
Boston, Massachusetts 02110, under assignment from Resource Capital Associates,
Inc., a Massachusetts corporation ("Resource Capital"); Cohasset Associates,
Inc., a Maryland corporation ("Cohasset"), with offices at 5007 Baltimore
Avenue, Bethesda, Maryland 20816; and PT Duma Na Napu ("Duma"), an Indonesia
corporation with offices at Rumah Maduma Jl. Dr. Sahar jo 52, Jakarta, 12970,
Indonesia, individually "the Party" and collectively "the Parties."
WHEREAS, the Parties hereto, other that K-Fuel LLC, entered into an
agreement dated February 28, 1995 ("the Agreement"), a copy of which is attached
at Exhibit 1, with respect to developing K-Fuel plants and related activities in
Indonesia with Pt Tambang Batabura Bukit Asam ("PTBA");
WHEREAS, the joint venture entered into a Memorandum of Understanding
with PTBA in August 1995 to exclusively develop K-Fuel plants in Indonesia;
WHEREAS, the parties are desirous of amending and modifying in its
entirety their relationships as set forth in such Agreement;
WHEREAS, K-Fuel LLC, a Delaware limited liability company with its
principal offices at 1999 Broadway, Suite 3200, Denver, Colorado 80202 ("K-Fuel
LLC"), of which KFx and Kennecott are members, has the sole exclusive right to
determine whether or not to pursue, exploite or develop the KFx technology in
Indonesia.
NOW, THEREFORE, it is agreed as follows:
1. Amendment.
----------
Except as specifically set forth herein, the "Agreement" is hereby
amended and the Parties are relieved of any and all obligations, commitments,
undertakings, rights, and responsibilities thereunder and the rights and
obligations of the Parties as set forth herein shall constitute the entire
relationship between them with respect to all matters set forth in the
"Agreement."
2. Payments to RCD.
----------------
If the KFx technology is exploited in Indonesia, and if K-Fuel LLC or
KFx and/or one or more of the affiliates of KFx and/or K-Fuel LLC causes a
plant or plants to be constructed in Indonesia on the island of Sumatra, which
plants are expected, in whole or in part, to use and do in fact use, at least 25
% PTBA coal, then K-Fuel LLC and KFx shall be jointly and severally liable to
pay or have paid to RCD by wire transfer, immediately available funds to pay to
RCD a fee of $2 (U.S.) per ton for the first one million five hundred thousand
(1,500,000) tons of installed capacity (as measured by the Rated Design
Capacity, as that term is defined in Schedule 1 of the Limited Liability Company
Agreement of K-Fuel LLC) with respect to such plant or plants and a fee of One
Dollar Thirty-Three Cents ($1.33) (U.S.) per ton for the second one million five
hundred thousand (1,500,000) tons of installed capacity from such plants, for
any plant or plants for which construction has commenced within ten years from
the date of this Agreement.
1
<PAGE>
3. Timing of Payment.
------------------
The payments provided for in Section 2 above shall be made
concurrently with the payment of any license fees to KFx or any affiliate
including K-Fuel LLC, in connection with any applicable plant, provided that in
no event shall the amount payable under Section 2 be paid later than one-half at
the time at which construction financing is in place and construction has
commenced with respect to said plant and one-half on the substantial completion
of construction of said plant (which shall be no later than the date it is first
placed in service).
4. Access to Information.
----------------------
KFx and K-Fuel LLC shall provide RCD with full and complete access to
all information necessary to the determination of the capacity with respect to
any plants to which the provisions of Section 2 and 3 of this Amendment to
Agreement applies. As of the date of this agreement, KFx has provided RCD with
the latest feasibility report related to the prospective Indonesian plant.
5. Remedies.
---------
Should KFx and K-Fuel LLC fail to provide the information provided for
in Paragraph 4 to RCD, (1) RCD shall have the right to obtain such information
by legal proceedings with the cost of any such proceedings or any other costs
incurred by RCD to obtain such information to be borne on a current as-due basis
by KFx and K-Fuel LLC, each of which shall be jointly and severally liable
therefore, and (2) such failure shall constitute a material breach hereunder.
Should KFx and/or K-Fuel LLC fail to pay RCD any amounts due
hereunder, such amounts, from the date due, shall bear interest at 18 % per
annum, compounding monthly, or the highest applicable rate permitted by
applicable law, if less. In addition, KFx and K-Fuel LLC shall pay on a current
as-due basis all legal fees, court costs and other expenses incurred by RCD in
enforcing any of its rights hereunder.
6. Definitions; Governing Law; Proceedings; Binding Effect; Amendments.
--------------------------------------------------------------------
Terms used herein and not otherwise defined shall have the meaning
such terms have in the Agreement. This Amendment to Agreement shall be governed
by and construed in accordance with the laws of the State of Colorado. Any
action to enforce this Amendment to Agreement shall be brought solely in the
United States of America. This Amendment to Agreement shall be binding upon and
inure to the benefit of the Parties hereto and their successors and assigns.
This Amendment to Agreement may only be amended or modified by a writing signed
by all of the Parties hereto.
2
<PAGE>
KFx Inc. RCD Development, a joint venture by
a Colorado corporation HB Capital Inc., a Delaware
corporation
/s/ Theodore Venners /s/ Alex M. Steinbergh
- -------------------------- ------------------------
Theodore Venners, Chairman Alex M. Steinbergh
K-Fuel LLC P.T. Duma Na Napu
a Delaware limited liability company an Indonesian corporation
By: KFx Inc., Member
_____________________________ /s/ Soy M. Pardede
--------------------------
Theodore Venners, Chairman Soy M. Pardede, President
Cohasset Associates, Inc.
a Maryland corporation
/s/ Pirooz Sharafi
- --------------------------------------
Piroox Sharafi, President
3
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<PERIOD-START> JAN-01-1996
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