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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, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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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
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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, 1998, the aggregate market value of the Registrant's common
stock held by non-affiliates of the Registrant was approximately $32,995,000.
At March 24, 1998, 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 18,
1998 are incorporated by reference into Part III.
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KFX INC.
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
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PAGE NO.
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PART I
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Item 1. Business........................................................................ 1
Item 2. Properties...................................................................... 12
Item 3. Legal Proceedings............................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders............................. 13
PART II
Item 5. Market for Common Stock and Related Stockholder Matters......................... 14
Item 6. Selected Financial Data......................................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................... 16
Item 8. Financial Statements and Supplemental Data...................................... 20
Item 9. Changes in and Disagreements with Accountants on Accounting
And Financial Disclosures....................................................... 20
PART III
Item 10. Directors and Executive Officers of the Registrant.............................. 21
Item 11. Executive Compensation.......................................................... 21
Item 12. Security Ownership of Certain Beneficial Owners and Management.................. 21
Item 13. Certain Relationships and Related Transactions.................................. 21
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................. 22
SIGNATURES...................................................................... 25
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PART I
ITEM 1. BUSINESS
GENERAL
KFX Inc. (the "Company"), a Delaware corporation, is a provider of
responsible energy solution technologies that enhance energy value and clean the
environment. The Company's primary enterprise is the business of licensing and
commercializing a technology that enhances the combustion characteristics of
coal and other carbonaceous solid fuels (the "K-Fuel 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").
CERTAIN RECENT DEVELOPMENTS
Pegasus Technologies, Ltd.
On March 23, 1998, the Company acquired a 60 percent interest in Pegasus
Technologies, Ltd., an Ohio limited liability company formed in August 1996
("Pegasus"), for $2,200,000, comprised of cash payments totaling $1,600,000 and
promissory notes totaling $600,000. Additionally, the Company has agreed to
provide Pegasus $1,400,000 in working capital guarantees secured through lines
of credit or other financing sources mutually acceptable to the Company and
Pegasus.
Pegasus has developed and is commercializing a neural network (i.e.,
artificial intelligence) software technology that optimizes the combustion
performance of coal-fired electric utility boilers. Pegasus' software product,
known as NeuSIGHT, provides two primary benefits: improved combustion
performance and reduction in nitrogen oxide ("NOx") emissions. NeuSIGHT
dynamically models in real-time the operating conditions of boiler operations
and makes recommendations and changes to operating variables that result in
improved boiler heat-rate performance, thereby reducing coal fuel costs. This
combustion optimization process also results in significant reductions in NOx.
NOx is a primary component of ground-level smog and the U.S. Environmental
Protection Agency ("EPA") has proposed regulations that would significantly
reduce the amount of NOx emissions currently allowed for certain U.S. electric
utilities (see "K-Fuel Domestic Market").
Charco Redondo, LLC
In December 1997, the Company purchased a 12.6 percent interest in Charco
Redondo, LLC, a Texas limited liability company ("Charco") in consideration for
its commitment to contribute $540,000 to Charco as working capital. Funding
under this commitment began in January 1998 and to date the Company has
contributed $404,000 to Charco.
Charco was formed to develop and complete a project intended to demonstrate
the effectiveness of Synthetic Energy Corporation's ("Synthetic") patented
process which uses mining techniques in connection with superheated steam and
moderate pressure to extract crude oil that otherwise cannot be extracted by
conventional production techniques. The technology licensed by Charco is based
on a patent held by John A. Masek (the "Masek Technology"). Charco has an
exclusive sublicense to use the Masek Technology in a four-county area of Texas
(the "AMI"), which is believed to have reservoirs containing approximately 1
billion barrels of crude oil which would be appropriate targets for application
of the Masek Technology. The pilot project (the "Charco Pilot Project") is
being conducted on a mineral lease covering approximately 1800 acres in southern
Texas. If the Charco Pilot Project is successful, Charco intends to complete
development of the lease, which contains an estimated 23 million barrels of
crude oil. The Company's interest in the profits and losses of Charco is 12.6
percent, other than in the Charco Pilot Project phase, for which it is
approximately 19 percent. There are no assurances that the Charco Pilot Project
will be successful.
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The Company also entered into an option agreement with Synthetic with
respect to the use of the Masek Technology outside the AMI. The option agreement
provides that the Company and Synthetic will form a joint venture to be owned
55% by the Company and 45% by Synthetic. Upon exercise of the option the
Company will have to pay $2.0 million to Synthetic, of which a total of $50,000
was paid upon execution of the option agreement. The Company is not committed
to pay any additional amounts to Synthetic under the option agreement until
certain performance milestones of the Charco Pilot Project are met.
Activated Carbon
In January 1998, the Company completed an initial feasibility study to
construct an activated carbon facility at the same site as the previously
proposed K-Fuel Partners II Project (as defined herein), adjacent to the KFP
Facility (as defined herein). The activated carbon facility, as proposed, would
be operated in conjunction with the KFP Facility and would utilize coal fines
and other process off-streams from the KFP Facility to reduce raw material and
operating costs substantially below those of similar free-standing activated
carbon production facilities. Permitting for the proposed activated carbon
facility is presently underway. Activated carbon can be made from coal or
various biowaste materials and is used in various industrial liquid and vapor-
phase treatment and purification processes, and can also be used in certain soil
remediation and mining applications.
In order to commence construction of an activated carbon facility,
contracts for engineering and construction, commitments for sale of the product,
financing commitments, and environmental and other permits must be secured. The
Company anticipates that one or more joint venture partners may be required to
assist the Company in constructing the activated carbon facility. To date there
are no definitive agreements with respect to an activated carbon plant, and the
Company is not able to predict if or when an activated carbon plant will be
constructed.
Debenture Offering
In August 1997, the Company completed the offer and sale (the "Debenture
Offering") of $17 million principal amount of the Company's 6% unsecured
convertible debentures due 2002 (the "Debentures"). The Debentures were sold
without registration under the Securities Act of 1933, as amended (the
"Securities Act") in reliance on the exemption from registration provided by
Regulation S under the Securities Act. The Debentures were offered, sold and
delivered only to non-United States persons outside of the United States, its
territories and possessions.
The aggregate underwriting discounts and commissions paid to the placement
agents in conjunction with the sale of the Debentures was $1,190,000 (7% of the
principal amount thereof). The Company also issued to the placement agents
and/or their designees, warrants (the "Placement Agents' Warrants") to purchase
453,333 shares of the Company's $.001 par value common stock (the "Common
Stock") with an exercise price of $5.00 per share.
The Debentures are convertible into shares of Common Stock at the option of
the holder of the Debentures at any time prior to maturity (unless previously
redeemed or repurchased by the Company), into that whole number of shares
determined by dividing (a) the principal amount of Debentures to be converted by
(b) the Conversion Price (as defined herein), subject to adjustment in certain
circumstances.
The initial Conversion Price is $3.75 per share and such price will be
reset on November 1, 1999 (the "Reset Conversion Date"). On and after the Reset
Conversion Date, the Conversion Price will be the product obtained by
multiplying (i) the Stock Price Factor (as defined below), by (ii) 90%. However,
the Conversion Price may not be less than $3.65 (the "Floor"), other than as the
result of the operation of customary antidilution adjustments set forth in the
indenture entered into between the Company and First Bank National Association,
as trustee dated as of July 25, 1997 (the "Indenture"); provided, however,
notwithstanding the foregoing, if the exercise price of the warrant issued to
TCK (as defined herein) to purchase 7,750,000 shares of Common Stock is reduced,
then the Floor will be adjusted downward on a dollar-for-dollar basis. "Stock
Price Factor" means the average American Stock Exchange ("AMEX") closing
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sale price per share (or, if the Company is listed or quoted on a U.S. exchange
other than AMEX, the average closing price on such exchange) for the 15 trading
days immediately preceding the Reset Conversion Date.
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 fuel product manufacturing
facilities. The Series "A" and "B" Technologies can also be used for coal fuel
product facilities, but the Company expects to also use them for renewable
resource (e.g., bagasse, municipal solid waste, sludge and wood waste) fuel
product manufacturing facilities. The Series "A" and "B" Technology patents were
developed by Edward Koppelman and assigned to the Company under a research and
development contract (the "R&D Contract") with the Company. The Company
purchased the initial Series "C" Technology patent directly from Mr. Koppelman
at a later date after completion of the R&D Contract. 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. To date,
one commercial-scale K-Fuel manufacturing facility has been constructed and has
begun operations. See "Current K-Fuel 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.
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 ("SO2")
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 SO2 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. SO2 per million Btu ("MMBtu") of heat output. Phase
II will begin in the year 2000 and will affect over
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1,400 electrical generating plants and other industrial users of coal. The
effective SO2 emission rate limitation under Phase II will be reduced to 1.2
lbs. SO2 per MMBtu. When using Wyoming Powder River Basin ("PRB") coal as
feedstock material, the K-Fuel Technology produces a fuel product that has a SO2
emission rate of approximately 0.7 to 1.0 lbs. SO2 per MMBtu.
The Company's United States marketing emphasis is directed primarily 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 SO2 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 SO2 provisions of the CAAA or that desire to improve
their fuel combustion performance. Fuel combustion performance is becoming more
important to electric utilities because of the need to cut costs and become more
efficient in an increasingly competitive market environment.
The K-Fuel Technology can also produce lower NOx emissions (when using PRB
coal as the feedstock) as compared to typical eastern coals. Laboratory tests
have indicated that such reductions can be up to approximately 50 percent. NOx
is a primary component in ground-level smog and is also a contributor to acid
rain. In October 1997, the EPA proposed new NOx emission guidelines for 22
midwestern and southern states and the District of Columbia that would
significantly reduce current allowed levels of NOx (in some states by up to
approximately 40 percent). Electric utility power plants are the likely targets
to reduce NOx as the overall cost to achieve the reduction levels is thought to
be less than reduction initiatives aimed at the automobile and manufacturing
industries. In February 1998, the U.S. Court of Appeals for the District of
Columbia rejected a legal challenge by the electric utility industry, upholding
certain 1996 regulations under the CAAA with respect to NOx control standards.
The court held that the standards were achievable and that the EPA had the
technical and legal authority to mandate such standards.
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. See "Current K-Fuel 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.
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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 Massachusetts 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 Common
Stock for $6 million, or approximately 14 percent of the outstanding Common
Stock as of December 31, 1996, and in 1997 purchased an additional 1.25 million
shares of Common Stock for $2.5 million, increasing its ownership to
approximately 18 percent of the outstanding Common Stock. As part of the
transaction TCK was also granted (i) a warrant ("Warrant A") to purchase an
additional 7,750,000 shares of Common Stock (subject to certain adjustments) at
an exercise price of $3.65 per share, exercisable on January 1, 2000 and
expiring July 1, 2001; and (ii) a warrant ("Warrant B"), that gives it the right
to purchase the number of shares of Common Stock (at the then prevailing market
price) 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 51 percent of the outstanding Common Stock, 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 K-Fuel 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 the 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 be granted 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. 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 (the "Initial Work Plan"). During 1997 and 1996, KAFI funded such
research and development costs totaling approximately $879,000 and $1,440,000,
respectively.
In the event that KAFI has not as of December 31, 2001 approved for
construction Commercial Projects in which KAFI will have an equity interest
having a design capacity equal to 1 million TPY of K-Fuel product, then the
Company may purchase KAFI's interest in K-Fuel LLC for a purchase price equal to
(a) 100 percent of the aggregate amount expended on third party costs, and (b)
75 percent of the aggregate amount charged for internal KAFI or KECC costs
incurred for the Initial Work Plan or any subsequent research and development
plan, plus a reasonable return on capital percentage.
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.
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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, 1997, there were no commitments to
construct any Commercial Projects.
Current K-Fuel 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 Facility") near
Gillette, Wyoming using the Company's Series "C" K-Fuel Technology. The Company
has a 5 percent interest in KFP, with the remaining 95 percent held by TCK. TCK
is the managing general partner for KFP and makes all day-to-day operating
decisions. The KFP Facility must be "placed in service" by June 30, 1998, to
qualify for certain federal tax credits on its output.
The KFP Facility was substantially completed in December 1996. TCK has
continued to refine and optimize operations at the KFP Facility, conducting
extensive testing and producing commercially salable K-Fuel product. Although
the KFP Facility has operated and produced commercially salable product, certain
difficulties have been encountered in attempting to achieve optimal and
sustained operations. Certain problems previously encountered, including a
December 1996 industrial fire at the facility and certain construction problems,
including issues relating to the flow of materials within the KFP Facility and
the design and operation of certain pressure-release equipment, have been
resolved. Currently, certain operational problems relating to tar residue
build-up within the system during production are being experienced. TCK is
actively exploring solutions to this problem. Because the technology being
developed at the KFP Facility is new and untested, no assurance can be given
that other difficulties will not arise or that these problems can be corrected
and optimal and sustained performance can be achieved. The Company does not
believe its share of such additional costs to bring the KFP Facility to optimal
operating performance, if incurred, will be material.
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 occur in the third quarter of 1998.
Total tonnage as per the FSA over the Original Term is 500,000 tons. See
"Patents, Licenses and Royalty Agreements." KFP has scheduled a 15-ton
combustion test at Southern Research Birmingham for the second quarter of 1998.
KFP is presently purchasing its raw coal feedstock on a spot market basis from a
neighboring coal mine,
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and is negotiating for a long-term coal purchase contract to commence when
startup operations have been completed.
The KFP Facility 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 1996 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
$46.62 per barrel and is fully phased out if the reference price exceeds $58.52.
For 1996 the reference price was $18.48 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
1996 dollars, the tax credit is currently valued at $25.45 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. If the
KFP Facility is not deemed to be placed in service by July 1, 1998, thereby
qualifying for the Section 29 tax credit, the return on investment on the KFP
Facility will be materially adversely affected.
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. The Company is
currently unable to directly utilize any Section 29 tax credits derived from its
5 percent ownership of KFP because of its cumulative net operating loss
carryforward.
K-Fuel LLC. Phase 1 of the Initial Work Plan was completed in 1997, with
emphasis on product reactivity and dusting and development of a new processing
vessel design. Phase 2 of the Initial Work Plan, consisting of construction of
a small demonstration plant based on a new processing vessel design, will be
considered after test burn results from the KFP Facility have been evaluated.
KAFI will fund 100 percent of the remaining Phase 2 research and development
program of K-Fuel LLC, up to $4 million. The Company expects that the total
costs of the Initial Work Plan will not exceed $4 million.
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 was terminated in the fourth quarter of 1997
because of the uncertainty regarding the KFP Facility and the Section 29 tax
credit placed-in-service date (July 1, 1998) becoming unrealistic given the
construction lead times necessary for the KFP II Project. The Company now is
seeking a permit to use the site for its proposed activated carbon facility.
Other pre-construction engineering activities related to the KFP II Project (and
a related project considered in 1997 to add a fifth processing vessel to the KFP
Facility) have been modified for the proposed activated carbon facility. See
"Activated Carbon."
Indonesia. In September 1995, KFX Indonesia, a joint venture between 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 1998, KFX Indonesia,
KAFI and PTBA expect to keep current detailed engineering studies of the
proposed mining and K-Fuel plant sites to keep abreast of the viability of the
Indonesia Project. The costs needed to maintain 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
7
<PAGE>
Project other than 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. Feasibility study costs
incurred in 1997 for the Indonesia Project were not material. 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 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.
Development of the Indonesia Project in 1997 suffered from the overall
economic and political problems experienced by Indonesia and other Asian
countries beginning in mid-1997. Further development of the Indonesian Project
(other than periodic assessment of Indonesian coal trade and overall economic
conditions) has been limited pending completion of the product test burns from
the KFP Facility and the return to a more stable economic and political
environment in Indonesia. The Company is not able to determine when such
conditions will materialize to allow the Indonesia Project to commence
construction.
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.
The Company is presently conducting pelletizing and test burns of raw
Turkish coal. The test burns are being conducted in a domestic-use combustion
chamber received from SOMA. After completion of these initial tests, shipment
of larger quantities of pelletized fuel product to Turkey for further testing is
planned.
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.
PATENTS, LICENSES AND ROYALTY AGREEMENTS
The Company has patents or patent applications for 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).
Included in the pending patent applications are inventions developed by the
Company as well as seven improvement patent applications assigned to the Company
as a result of the K-Fuel LLC research activities.
The only licenses the Company has granted to the K-Fuel Technology are to
the KFP Facility (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,
8
<PAGE>
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 Indiana
Michigan Power Company ("I&M"), a subsidiary of AEP, 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 for $10 million in cash and a royalty agreement of $90 million. 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 (discussed below). 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 for
$200,000. See Note 7 to the consolidated financial statements. 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. Also as part of the royalty
agreement, Mr. Koppelman indemnified the Company for any claims made by the
Koppelman Group. Mr. Koppelman is now deceased and all his rights and
obligations as discussed above are held by his estate.
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>
Estate of Edward 25 Percent/(1)/ 25 Percent $75,222,000
Koppelman
State of Wyoming 12 Percent/(2)/ NA - None $5,000,000/(2)/
Fort Union Ltd. 20 Percent/(3)/ Canada, Mexico Earlier of cumulative royalties paid of
$1,500,000 or September 15, 2015
Ohio Valley Electric 0.5 Percent/(4)/ NA None None
</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 $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.
9
<PAGE>
GOVERNMENT AND ENVIRONMENTAL REGULATION
K-Fuel
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 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 Facility, and the Company expects no difficulties in obtaining the
necessary permits for the activated carbon facility (formerly 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
Facility 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
Facility, the previously proposed KFP II Project, and the Company's mine
property adjacent to the KFP Facility (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 1998 annual permit review
was submitted to DEQ in December 1997 and is expected to be approved by DEQ no
later than May 1998. The total reclamation obligations of KFP, KFP II and KFX
Wyoming are currently estimated at approximately $3,791,000, including certain
contingency amounts required under Wyoming law. Upon approval of the 1998
operating permit by DEQ, KFX Wyoming and KFP will each be required to provide
reclamation bonds as collateral to the DEQ for the estimated reclamation
obligations. The future reclamation obligation of KFX Wyoming as submitted in
the 1998 annual permit review is approximately $1,166,000. The Company expects
that there will be no significant additional reclamation requirements in 1998.
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 and
Turkey) are not as stringent as those in the United States.
Charco Redondo, LLC
The operations of Charco are regulated to the extent of environmental
permitting by various state and local governmental authorities and by the Mine
Safety and Health Administration ("MSHA") to the extent of its mining activities
to excavate subsurface production rooms. To the best of the Company's
knowledge, Charco is currently in compliance with all such governmental
regulations.
Pegasus Technologies, Ltd.
The operations of Pegasus are not significantly impacted by governmental
regulation with respect to its development of the NeuSIGHT software product.
However, the market acceptance of the NeuSIGHT software is significantly
impacted by the various issues surrounding the current trend to de-regulate the
domestic electric utility industry. Currently, those industry trends are
positively impacting Pegasus as the NeuSIGHT software can significantly reduce
utility fuel costs and NOx emissions, thereby benefiting electric utilities in
a de-regulated scenario that favors low-cost operations.
10
<PAGE>
COMPETITION
K-Fuel
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.
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. The ENCOAL process also produces a liquid
fuel product known as Coal Derived Liquid ("CDL"). ENCOAL has reported
completion of its demonstration project conducted in participation with the U.
S. Department of Energy and has idled its demonstration plant. ENCOAL has
further indicated that it is presently developing commercialization options for
its technology.
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.
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 Facility
fully operational in 1998 to prove the K-Fuel Technology in the early stages of
a developing worldwide market that is expected to grow significantly in the
future.
Pegasus Technologies, Ltd.
Pegasus' primary competitors are Pavillion Corporation and its Process
Insights system and Electric Power Research Institute ("EPRI") and its GNOCIS
system. Other information technology companies are currently developing and
marketing software systems to compete with Pegasus' NeuSIGHT system, including
Praxis Engineering, Aspen Technologies, and NeuCO (a joint venture between
Commonwealth Energy Systems and Charles River Associates). Many of these
potential competitors to Pegasus may have financial, technical and operational
resources greater than those of Pegasus.
Pegasus' current competitive advantage is that it is the only neural
network software company yet to achieve closed-loop supervisory control of
utility combustion systems with automatic retraining and optimization of the
neural network database. None of Pegasus' competitors, to the best of its
knowledge, have yet achieved this level of technical performance on coal-fired
utility boilers.
11
<PAGE>
RESEARCH AND DEVELOPMENT
In 1997 and 1996, the Company incurred approximately $1,251,000 and
$1,198,000, 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 1997 and 1996 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.). The Company will continue to operate its Gillette, Wyoming demonstration
facility in 1998 in a supporting role to K-Fuel LLC and KFP. See "ITEM 2 -
PROPERTIES."
EMPLOYEES
The Company currently has 12 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.
Pegasus Technologies, Ltd. currently has 11 full-time employees who work in
the areas of software development, implementation, finance and administration.
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 Facility (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
transferred ownership of approximately 348 acres of surface land and the coal
loadout facilities to KFP.
12
<PAGE>
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 ("Court"). 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. On May 20, 1997, the Court granted
the Company's Motion for Summary Judgment on all claims. Fru-Con has appealed
to the 10th Circuit Court of Appeals. 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.
On March 9, 1998, Fidelity and Deposit of Maryland, as subrogee of Walsh
Construction Company, a division of Guy F. Atkinson Company, filed a
construction lien against KFP with respect to the construction of the KFP
Facility in the amount of approximately $5.9 million. It is not possible at
this time to evaluate the merits of the claim or the range of potential loss.
However, 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 1997.
13
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Beginning January 30, 1996, the Common Stock was traded on the American
Stock Exchange (under the trading symbol "KFX"). 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 SmallCap Market and the reported sales
prices on the American Stock Exchange for the two-year period ended December 31,
1997. 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>
1997 First Quarter $5 3/4 $3 7/8
Second Quarter 4 1/2 3 1/4
Third Quarter 4 1/16 2 5/8
Fourth Quarter 3 13/16 2 7/16
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
</TABLE>
As of March 24, 1998, the Company had 225 holders of record of the Common
Stock. This does not include holdings in street or nominee names. On March 24,
1998, the closing price of the Common Stock on the American Stock Exchange was
$3 3/8 per share.
The Company has never paid cash dividends and does not anticipate paying
dividends in the foreseeable future. The Company is also restricted from paying
dividends pursuant to the terms of the Indenture. In addition, pursuant to the
Stock Purchase Agreement, so long as TCK, together with its affiliates, own at
least 1,000,000 shares of Common Stock and either of the warrants are
outstanding, the Company may not declare or pay any dividends on the Common
Stock other than dividends payable solely in shares of Common Stock. See "ITEM
1 - BUSINESS - Strategic Relationships - Thermo Ecotek Corporation."
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA FOR THE YEAR
ENDED DECEMBER 31:
Total revenues and
other income ................ $ 1,735,176 $ 1,767,567 $ 379,322 $ 452,775 $ 2,239,730
Interest and other income .... 650,353 171,269 124,959 88,188 544,565
Loss before income taxes
and extraordinary item ....... (5,095,160) (5,628,541) (8,795,929) (6,119,677) (3,528,698)
Net income (loss) ............. (5,095,160) (5,628,541) (6,228,720) 2,349,126 (3,528,698)
Basic and diluted net income
(loss) per share ............ (.21) (.25) (.33) .14 (.23)
Average shares
outstanding .................. 23,820,000 22,458,000 18,578,000 16,621,000 15,472,000
BALANCE SHEET DATA
AT DECEMBER 31:
Current assets ................ $14,461,198 $ 1,957,005 $ 4,680,784 $ 449,895 $ 5,736,853
Working capital (deficit) .... 12,565,373 (166,521) 2,253,682 (6,940,882) (14,863,745)
Total assets .................. 29,057,706 14,923,567 18,611,493 11,630,896 18,009,849
Long-term debt ............... 17,500,000 1,110,000 1,399,851 650,000 280,000
Stockholders' equity (deficit) 8,495,881 10,524,041 13,752,528 3,590,119 (2,870,749)
</TABLE>
15
<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. 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 $5.1 million, $5.6 million, and $8.8 million in 1997, 1996
and 1995, respectively. The KFP Facility is the only commercial-scale K-Fuel
production facility constructed to date. Until the Company successfully
negotiates additional third-party licensing and royalty agreements,
independently constructs and operates additional commercial-scale K-Fuel
production facilities, or successfully enters into other lines of environmental
and/or energy technology businesses, net operating losses will continue. The
royalties and profit interests to be derived from the Company's 5 percent
ownership interest in the KFP Facility 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 K-Fuel production facilities
(either owned independently or through joint venture entities similar to the KFP
Facility) or has successfully entered into other lines of environmental and/or
energy technology businesses to generate positive cash flow from operations, the
Company will be dependent on additional debt and/or equity financing. The
Company has recently made investments in environmental and energy technologies
not directly related to the K-Fuel Technology that may provide a more rapid
economic return than the K-Fuel Technology (see "ITEM 1 - BUSINESS Certain
Recent Developments"). There are no assurances that any of these investments
will produce an acceptable economic return, if at all.
Additionally, any equity participation that the Company negotiates for
future commercial-scale K-Fuel 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."
The Company expects that most or all of its financing needs in 1998 with
respect to day-to-day operations and debt service requirements will be satisfied
by the proceeds of the Debenture Offering. See Note 10 to the consolidated
financial statements.
RESULTS OF OPERATIONS
Year Ended December 31, 1997 vs. Year Ended December 31, 1996
The Company had a net loss of approximately $5,095,000 in 1997 compared to
a net loss of approximately $5,629,000 in 1996. The decrease of approximately
$534,000 is attributable to a decrease in revenue of approximately $32,000 in
1997 as compared to 1996, and a decrease in expenses of approximately $566,000
in 1997 as compared to 1996.
Revenues decreased slightly from 1996 to 1997 due to several factors: 1) a
one-time joint venture fee of $1,000,000 received in 1996 which was not repeated
in 1997; 2) an increase in contract revenues of $489,000 from the increased
level of technical subcontract work the Company performed for KFP, and 3)
16
<PAGE>
an increase in interest and other income of $479,000 as a result of overall
higher cash balances resulting from the Debenture Offering, and certain payable
write-offs. The Company will perform additional technical subcontract work for
KFP through the second quarter of 1998, although the dollar amount of such work
in not currently determinable. The decrease in technical subcontract work
performed for K-Fuel LLC in 1997 was expected given the planned schedule and
timing of the K-Fuel LLC Initial Work Plan.
Expenses decreased by approximately $566,000 in 1997 as compared to 1996.
The components of the overall decrease in expenses are summarized as follows
(all figures are approximate):
<TABLE>
<S> <C>
Decrease in marketing, general and administrative expenses.................... $ 569,000
Write-down of mine property and reclamation costs
Incurred in 1996........................................................... 701,000
Increase in depreciation and amortization expense............................. (108,000)
Increase in research and development / laboratory operating expenses.......... (52,000)
Increase in equity loss of unconsolidated affiliates.......................... (182,000)
Increase in interest expense.................................................. (362,000)
---------
Net decrease in expenses................................................ $ 566,000
=========
</TABLE>
Marketing, general and administrative expenses decreased by approximately
$569,000 in 1997 compared to 1996 primarily as a result of (1) personnel
reductions in 1997 which decreased salaries and wages by approximately $220,000;
(2) an overall decrease in professional fees in 1997 by approximately $487,000;
and (3) reduction of travel expenses in 1997 by approximately $100,000. These
decreases were partially offset by an overall increase in other general and
administrative expenses in 1997 of approximately $238,000.
The decrease in salaries and wages in 1997 is attributable to the Company
implementing a personnel reduction program in which the total number of
employees of the Company was reduced from 17 in 1996 to 12 in 1997 (reduction of
3 executive positions and 2 administrative positions). Professional fees
decreased in 1997 primarily due to $340,000 of legal expenses related to the K-
Fuel, LLC joint venture agreement incurred in 1996. The increase in general and
administrative expenses is primarily due to (1) a one-time charge of $163,000 to
write-off previously capitalized project development expenses associated with
the previously planned KFP II Project; (2) approximately $100,000 of internal
costs associated with the Debenture Offering and permitting costs related to the
Company's coal mining property adjacent to the KFP Facility; offset by a one-
time payment of a $50,000 listing fee with the American Stock Exchange incurred
only in 1996.
The mine property and reclamation costs write-down of $701,000 relating to
the Company's coal mine located near Gillette, Wyoming was a one-time expense
incurred only in 1996. No additional material write-downs are expected in 1998.
In addition, the Company does not expect to incur any additional material
reclamation costs in 1998.
The increase in depreciation and amortization expense in 1997 is primarily
attributable to the Company's re-evaluation of the depreciable useful lives of
certain demonstration plant and laboratory equipment located in Gillette,
Wyoming (approximately $216,000), the amortization of Debenture Offering costs
beginning in August 1997 (approximately $205,000), offset by the amortization of
a consulting contract in 1996 of approximately $281,000.
The increase in research and development and laboratory expenses is
attributable to increased efforts associated with overall project developments
activities, with particular emphasis on the activated carbon program, the
proposed projects in Indonesia and Turkey, and the start-up of the KFP Facility.
The Company will continue to perform such services for these projects in 1998,
although the amount and scope of such work is not currently determinable.
The increase in equity loss of unconsolidated affiliates relates to losses
the Company recognized for its 51 percent share of the marketing, general and
administrative expenses of K-Fuel LLC for a full year
17
<PAGE>
in 1997 versus a partial year in 1996. The Company will continue marketing
efforts through K-Fuel LLC, and as the KFP Facility becomes fully operational,
these expenses are expected to increase in 1998.
The increase in interest expense is attributable to the Debenture Offering
completed in July 1997 which has resulted in monthly interest of $85,000
beginning in August 1997. The Company incurred $425,000 of interest expense
related to this debt in 1997. This was partially offset by overall lower levels
of other debt in 1997.
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 decrease of approximately $3,167,000 is attributable to
an increase in revenue of approximately $1,388,000 in 1996 as compared to 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 in 1995.
Expenses decreased by approximately $1,779,000 in 1996 as compared to 1995.
The components of the overall decrease in expenses are summarized as follows
(all figures are approximate):
<TABLE>
<S> <C>
Decrease in marketing, general and administrative expenses............... $ 899,000
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 equity loss of unconsolidated affiliates..................... (86,000)
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 approximately
$899,000 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. This decrease was partially offset by an overall increase in payroll
and general administrative expenses in 1996 totaling approximately $138,000.
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 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.
18
<PAGE>
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.
The increase in equity loss of unconsolidated affiliates is due to the
first year in which the Company recognized losses for its 51 percent share of
the marketing, general and administrative expenses of K-Fuel LLC.
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 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 but would retain it to hold the mining property as a reserve coal
supply for the KFP Project to protect against any raw coal feedstock
disruptions. 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.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased from a deficit of approximately $167,000 at
December 31, 1996 to a surplus of approximately $12,565,000 at December 31,
1997. The increase is primarily attributable to $2.5 million in proceeds from
the sale of Common Stock to TCK in January 1997 and approximately $15.1 million
in net proceeds from the Debenture Offering.
The Company expects no additional stock purchases by TCK in 1998 or 1999.
Under the terms of the 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 Stock Purchase Agreement prohibits the Company
from issuing 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."
The Company may be required to seek additional debt and / or equity
financing as early as the second or third quarter of 1999 for general operating
purposes or for capital investments. Factors that may reduce or eliminate the
need for additional financing in 1999 are as follows: (1) license fees from
proposed K-Fuel projects in Indonesia and Turkey; (2) cash flow distributions
from the Company's 60 percent ownership of Pegasus; (3) cash flow distributions
from Charco; and (4) a sale of all or a portion of the Company's 5 percent
ownership interest in KFP.
The Company expects no material net operating revenues from its ownership
interest in KFP in the foreseeable future. Additionally, the Company's net
production royalties (after fulfilling related royalty obligations) once the KFP
Facility reaches full production is projected to be less than $200,000 per year.
The Section 29 tax credit available for the KFP production of K-Fuel at full
capacity could result in an opportunity to sell the Company's interest to TCK or
other third parties; the Company intends to try to retain its production royalty
following any such sale. The value, amount or possibility of any such sale
19
<PAGE>
will not be determinable until KFP reaches its full productive capacity,
currently expected to be in the third or fourth quarter of 1998.
Should the Company be required to seek any additional debt or equity
financing, the ability of the Company to do so may be affected by an existing
agreement with TCK and by the terms of the Indenture. With respect to TCK, the
Company must obtain TCK's consent to sell any Common Stock or to incur any
indebtedness other than indebtedness that is secured only by the assets of a
particular project and is non-recourse to the Company and its subsidiaries.
With respect to the Indenture, the Company may only incur unsecured indebtedness
of up to $8.0 million (of which approximately $1.4 million was outstanding as of
March 24, 1998) and indebtedness secured only by the assets of a particular
project and is non-recourse to the Company and its subsidiaries.
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.
YEAR 2000 COMPLIANCE
Like many other companies, the Company is aware of the problems associated
with "The Year 2000 Issue." This issue centers on certain computer systems being
unable to recognize the year 2000 as a valid date or may interpret a date in the
format of "00" as the year 1900 rather than the year 2000. This system issue
creates risk for the Company from unforeseen problems in its own computer
systems and from third parties with which the Company deals. Such failures of
the Company and/or third parties' computer systems could potentially have a
material impact on the Company's ability to conduct its business. Based on
interviews with and publications from those vendors supplying the Company's
current business information systems, management believes those systems to be
date compliant such that they will not pose a significant risk to the Company's
future business operations. Future version upgrades to these systems and/or new
acquisitions will be subjected to Year 2000 date compliance as selection,
acceptance, and installation criteria.
During 1998, the Company will assess any impact the Year 2000 issue may
have on other systems that support the Company's operation. These can include,
but are not limited to, supplier systems, shipper systems, environmental control
systems, manufacturing equipment, building security systems, etc. The Company
will evaluate appropriate courses of corrective action if any are needed outside
of routine maintenance or currently planned projects.
The Company has made an initial assessment of the Year 2000 issue and
related potential effects on the Company's operations, and has determined that
it will not have a material effect on its financial position or results of
operations.
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 1997.
20
<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, 1997, and is incorporated by reference as if set
forth in full.
21
<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 /(5)/ Second Amended and Restated Bylaws of the Company -
4.1 /(5)/ Sample Common Stock Certificate -
4.2* Indenture dated July 25, 1997 by and between the Company and -
Colorado National Bank
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 /(4)/ Internal Revenue Service Private Letter ruling dated March 20, 1995 -
10.16 /(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
10.17 /(2)/ Stock Purchase Agreement dated August 18, 1995 between the -
Company and Thermo Ecotek Corporation
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NUMBER
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
10.18 /(2)/ Stock Purchase Warrants dated August 18, 1995 between the -
Company and Thermo Ecotek Corporation
10.19 /(2)/ Stockholders' Voting and Co-Sale Agreement dated August 18, 1995 -
among the Company, Thermo Ecotek Corporation and
Theodore Venners.
10.20 /(2)/ Registration Rights Agreement dated August 18, 1995 between the -
Company and Thermo Ecotek Corporation
10.21 /(3)/ Limited Partnership Agreement of KFX Fuel Partners, L.P. -
dated August 18, 1995
10.22 /(3)/ Letter Agreement dated August 18, 1995 between Eco Fuels, Inc. -
and KFX Wyoming, Inc. regarding the Management, Operations
and Maintenance Agreement
10.23 /(3)/ Gross Royalty Share Agreement dated August 17, 1995 between -
the Company and Fort Union, Ltd.
10.24 /(3)/ Indemnity Agreement dated August 18, 1995 between the Company -
and Thermo Ecotek Corporation
10.25 /(3)/ Letter of Agreement dated August 15, 1995 between the Company -
and Edward Koppelman
10.26 /(3)/ Assignment dated August 29, 1995 executed by Edward Koppelman -
in favor of the Company
10.27 /(3)/ Promissory Note dated August 25, 1995 executed by the Company -
in favor of Edward Koppelman
10.28 /(3)/ Patent and Technology License dated August 17, 1995 between -
Edward Koppelman and KFX Fuel Partners, L.P.
10.29 /(3) Notice of Termination dated August 16, 1995 between Edward -
Koppelman and Energy Brothers Holding, Inc.
10.30 /(5)/ Letter Agreement dated February 28, 1995 between RCD -
Development and the Company
10.31 /(6)/ Limited Liability Company Agreement of K-Fuel, L.L.C. -
dated April 19, 1996
10.32 /(6) Pledge Agreement executed by Theodore Venners in favor of -
Kennecott Energy and Coal Company dated April 19, 1996
10.33 /(6)/ Letter Agreement between Theodore Venners and Kennecott -
Energy and Coal Company dated April 22, 1996
10.34 /(6)/ Amended and Restated Heartland License Agreement between -
Heartland Fuels Corporation and the Company dated
April 19, 1996
10.35 /(7)/ Royalty Amendment Agreement dated June 3, 1996 between the -
Company, Edward Koppelman and Theodore Venners
10.36 /(7)/ Promissory Note to Edward Koppelman dated June 3, 1996 -
10.37 /(8)/ Design-Build Agreement between the Company and Yanke Energy
dated December 30, 1996 -
10.38 /(8)/ Amendment to Agreement between the Company and
RCD Development dated January 16, 1997 -
10.39 /(*)/ Purchase Agreement dated March 23, 1998 among the Company and -
Pegasus Technologies, Ltd. and the Lucier Group and The Radl Group
10.40 /(*)/ Amended and Restated Operating Agreement of Pegasus Technologies -
dated March 23, 1998
21.1 /(*)/ Subsidiaries 26
23.1 /(*)/ Consent of Independent Accountants 27
27.1 /(*)/ Financial Data Schedule -
</TABLE>
____________________
23
<PAGE>
<TABLE>
<S> <C>
/(*)/ 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.
/(8)/ Document previously filed with the U.S. Securities and Exchange Commission with the
Company's Annual Report on Form 10-K for the year ended December 31, 1996
and incorporated herein by reference.
</TABLE>
(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, 1997.
24
<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>
<S> <C>
Date: March 24, 1998 By: /s/ Theodore Venners
------------------------------------------------
Theodore Venners
Chairman of the Board of Directors
President and Chief Executive Officer
</TABLE>
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.
<TABLE>
<S> <C>
Date: March 24, 1998 By: /s/ Jeffrey A. Hansen
------------------------------------------------
Jeffrey A. Hansen
Chief Financial Officer
Date: March 24, 1998 By: /s/ Rudolph G. Swenson
------------------------------------------------
Rudy G. Swenson
Secretary and Treasurer
Date: March 24, 1998 By: /s/ Vincent N. Cook
------------------------------------------------
Vincent N. Cook
Director
Date: March 24, 1998 By: /s/ Brian D. Holt
------------------------------------------------
Brian D. Holt
Director
Date: March 24, 1998 By: /s/ Peter G. Martin
------------------------------------------------
Peter G. Martin
Director
Date: March 24, 1998 By: /s/ Jack C. Pester
------------------------------------------------
Jack C. Pester
Director
Date: March 24, 1998 By: /s/ Stanley G. Tate
------------------------------------------------
Stanley G. Tate
Director
</TABLE>
25
<PAGE>
SUBSIDIARIES - EXHIBIT 21.1
<TABLE>
<CAPTION>
ADDRESS OF PRINCIPAL STATE OF INCORPORATION PERCENTAGE
SUBSIDIARY PLACE OF BUSINESS OR ORGANIZATION OWNERSHIP
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
KFX Technology, Inc. 3574 Garner Lake Road Wyoming 99.8 %
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 Corporation /(*)/ 1999 Broadway Wisconsin 85.0 %
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
Pegasus Technologies, Ltd. 1100 Mentor Avenue Ohio 60.0 %
Painesville, OH 44077
</TABLE>
/(*)/ Entity is substantially inactive with no significant assets or revenues.
26
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS - EXHIBIT 23.1
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statement on Form S-3 (No. 333-4298), the
Registration Statement on Form S-3 (No. 333-28129) and the Registration
Statement on Form S-8 (No. 333-9873) of KFX Inc. of our report dated March 31,
1998 appearing on page F-2 of this Form 10-K.
PRICE WATERHOUSE LLP
Denver, Colorado
April 10, 1998
27
<PAGE>
KFX INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Accountants F-2
Consolidated Balance Sheets.......................................... F-3
Consolidated Statements of Operations................................ F-4
Consolidated Statements of Stockholders' Equity...................... F-5
Consolidated Statements of Cash Flows................................ F-6 to F-7
Notes to Consolidated Financial Statements........................... F-8 to F-22
</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, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, 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 31, 1998
F-2
<PAGE>
KFX INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1997 1996
ASSETS ------------ -------------
------
<S> <C> <C>
Current:
Cash and cash equivalents............................................ $ 14,078,773 $ 1,403,625
Accounts receivable.................................................. 220,729 447,230
Accrued interest..................................................... 52,000 --
Prepaid expenses..................................................... 109,696 106,150
------------ -------------
Total current assets.............................................. 14,461,198 1,957,005
------------ -------------
Property, plant and equipment, net of accumulated depreciation......... 4,458,305 5,458,801
Patents, net of accumulated amortization............................... 3,087,853 3,662,894
Investment in and advances to KFX Fuel Partners, L.P................... 3,787,138 2,792,304
Investment in K-Fuel, L.L.C............................................ 224,016 157,180
Debt issue costs, net of accumulated amortization...................... 2,230,565 -
Prepaid royalty........................................................ 500,000 500,000
Other assets........................................................... 308,631 395,383
------------ -------------
$ 29,057,706 $ 14,923,567
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current:
Accounts payable..................................................... $ 363,881 $ 1,041,800
Accrued expenses..................................................... 190,001 166,651
Due to related parties............................................... 557,522 707,756
Interest payable..................................................... 504,421 92,319
Current maturities of long-term debt................................. 280,000 115,000
------------ -------------
Total current liabilities......................................... 1,895,825 2,123,526
------------ -------------
Long-term debt, less current maturities................................ 500,000 1,110,000
Convertible debentures................................................. 17,000,000 -
Mine reclamation liability............................................. 1,166,000 1,166,000
------------ -------------
Total liabilities................................................. 20,561,825 4,399,526
------------ -------------
Commitments and contingencies (Notes 2,4,5,7,14,16)
Stockholders' equity:
Preferred stock, $.001 par value, 20,000,000 shares authorized;
none issued....................................................... -- --
Common stock, $.001 par value, 80,000,000 shares authorized;
23,926,040 and 22,676,040 shares issued and outstanding........... 23,926 22,676
Additional paid-in capital........................................... 47,758,843 44,693,093
Accumulated deficit.................................................. (39,286,888) ( 34,191,728)
------------ -------------
Total stockholders' equity........................................ 8,495,881 10,524,041
------------ -------------
$ 29,057,706 $ 14,923,567
============ =============
</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,
-------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Joint venture fee....................................... $ -- $ 1,000,000 $ --
Contract revenue........................................ 1,084,823 596,298 254,363
Interest and other income............................... 650,353 171,269 124,959
----------- ----------- -----------
Total revenue and other income........................ 1,735,176 1,767,567 379,322
----------- ----------- -----------
Marketing, general and administrative expenses.......... 2,795,121 3,364,574 4,264,034
Performance fees related to investment in
KFX Fuel Partners, L.P................................ -- -- 960,000
Litigation settlement................................... -- -- 800,000
Research and development................................ 493,723 465,166 444,329
Demonstration plant and laboratory operations........... 756,969 733,268 371,921
Write-down of mine property and reclamation costs....... -- 700,500 --
Equity in loss of unconsolidated affiliates............. 267,977 86,572 --
Depreciation and amortization........................... 1,969,561 1,861,164 1,657,385
Interest expense........................................ 546,985 184,864 677,582
----------- ----------- -----------
Total expenses........................................ 6,830,336 7,396,108 9,175,251
----------- ----------- -----------
Loss before income taxes and extraordinary item......... (5,095,160) (5,628,541) (8,795,929)
Income tax benefit...................................... -- -- 872,851
----------- ----------- -----------
Loss before extraordinary item.......................... (5,095,160) (5,628,541) (7,923,078)
Extraordinary item:
Gain from debt extinguishment, net of income taxes
of $872,851........................................ -- -- 1,694,358
----------- ----------- -----------
Net loss.............................................. $(5,095,160) $(5,628,541) $(6,228,720)
=========== =========== ===========
Basic and diluted net income (loss) per common share:
Before income taxes and extraordinary item............ $(.21) $(.25) $(.47)
Income tax benefit and extraordinary item............. -- -- .14
----------- ----------- -----------
Net loss.............................................. $(.21) $(.25) $(.33)
=========== =========== ===========
Weighted average common shares outstanding: 23,820,000 22,458,000 18,578,000
=========== =========== ===========
</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, 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)
Stock issued for cash.................. 1,250,000 1,250 2,498,750
Warrants issued in connection with
Placement of convertible debentures.. -- -- 567,000
Net loss............................... -- -- -- (5,095,160)
---------- ------- ----------- ------------
Balance, December 31, 1997............. 23,926,040 $23,926 $47,758,843 $(39,286,888)
========== ======= =========== ============
</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,
------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.............................................. $(5,095,160) $(5,628,541) $(6,228,720)
Adjustments to reconcile net loss to cash
Used in operating activities:
Income tax benefit and extraordinary item......... -- -- (2,567,209)
Depreciation and amortization..................... 1,969,561 1,861,164 1,657,385
Write-down of mine property and
reclamation costs................................ -- 700,500 --
Amortization of discount on notes payable......... -- -- 273,000
Equity in loss of unconsolidated affiliates....... 267,977 86,572 --
Common stock issued for services.................. -- -- 713,919
Stock options and warrants issued for services.... -- 237,500 840,000
Common stock issued by the Company and a
director and officer to settle litigation........ -- -- 800,000
Promissory notes exchanged for services........... -- -- 30,000
Other, net........................................ (16,197) -- (105,794)
Changes in operating assets and liabilities:
Accounts receivable and prepaid expenses.......... (155,332) (669,687) 62,918
Interest receivable............................... (52,000) -- --
Trade and related party payables.................. (590,715) 569,925 120,685
Accrued interest and other liabilities............ 435,452 (28,886) 720,797
Prepaid royalty................................... -- (300,000) --
Other............................................. (95,281) (37,431) --
----------- ----------- -----------
Cash used in operating activities....................... (3,331,695) (3,208,884) (3,683,019)
----------- ----------- -----------
INVESTING ACTIVITIES:
Reclamation deposit................................... -- 1,503,032 (1,503,032)
Patents acquisition and pending patent applications... (59,260) (35,918) (1,092,652)
Investments in K-Fuel, L.L.C.......................... (334,813) (243,752) --
Investments in KFX Fuel Partners, L.P................. (733,120) -- (107,114)
Acquisition of Heartland Fuels Corporation stock...... -- -- (100,000)
Purchases of property and equipment................... (16,175) (211,700) (70,656)
Other................................................. (36,224) (130,221) (8,180)
----------- ----------- -----------
Cash provided by (used in) investing activities......... (1,179,592) 881,441 (2,881,634)
----------- ----------- -----------
FINANCING ACTIVITIES:
Net proceeds from sale of common stock................ 2,500,000 1,449,880 10,096,875
Proceeds from issuance of notes/debentures............ 17,000,000 -- 1,490,000
Debenture placement fees.............................. (1,868,565) -- --
Payments on promissory notes.......................... (445,000) (588,851) (2,231,447)
----------- ----------- -----------
Cash provided by financing activities................... 17,186,435 861,029 9,355,428
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents........ 12,675,148 (1,466,414) 2,790,775
Cash and cash equivalents, beginning of period.......... 1,403,625 2,870,039 79,264
----------- ----------- -----------
Cash and cash equivalents, end of period................ $14,078,773 $ 1,403,625 $ 2,870,039
=========== =========== ===========
</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,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ............................... $134,605 $157,404 $297,821
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
See Notes 2,3,4,7,9,10, 11, 12 and 13.
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 LLC"),
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, 1997, cash and cash equivalents included commercial paper and money market
accounts of $14,068,510. Such amounts are carried at cost which at December 31,
1997 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.
DEFERRED FINANCING COSTS
The Company has capitalized issuance costs related to the convertible
debentures. These costs are amortized over the life of the debentures using the
straight-line method, the results of which are not materially different than
using the effective interest method because of the short life of the debentures.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
F-8
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
STOCK BASED COMPENSATION
The Company periodically grants stock options to certain executive
officers, non-employee directors and other key employees under two employee
stock option plans the Amended and Restated Stock Option Plan and the 1996 Stock
Option and Incentive Plan. Under these plans, stock options are accounted for in
accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees" ("APB25").
INCOME (LOSS) PER SHARE
In 1997, the Financial Account Standards Board ("FASB") issued Statement
No. 128, "Earnings per Share" (FASB 128). FASB 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previous concept of fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented to conform to the Statement 128 requirements. The effects of options,
warrants, and convertible securities have not been considered for the years
ended December 31, 1997, 1996 and 1995 because the result 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,
equity investments, 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 2,3,4,7,12, and 14 for additional information with
respect to these estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the current year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 131 "Disclosures about Segments
of an Enterprise and Related Information" ("FASB 131"), which requires publicly-
held companies to report financial and descriptive information about its
operating segments in financial statements issued to shareholders for interim
and annual periods. The Statement also requires additional disclosures with
respect to products and services, geographical areas of operations, and major
customers. FASB 131 is effective for fiscal years beginning after December 15,
1997 and requires restatement of earlier periods presented. Such adoption is not
expected to have a material effect on the Company's financial position or
results of operation.
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,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Demonstration plant.......................... $10,854,375 $10,854,375
Mine property................................ 465,500 465,500
Laboratory equipment......................... 53,880 51,307
Buildings.................................... 90,781 90,781
Office and computer equipment................ 192,589 178,988
----------- -----------
11,657,125 11,640,951
Less accumulated depreciation................ (7,198,820) (6,182,150)
----------- -----------
$ 4,458,305 $ 5,458,801
=========== ===========
</TABLE>
Depreciation expense was $1,016,670 and $837,945 in 1997 and 1996,
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.
The mine reclamation liability of $1,166,000 at December 31, 1997
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.
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.
F-10
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 3. PATENTS
Patents consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
----------- -----------
<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...................... 212,922 212,922
Domestic and foreign patents - pending......... 182,589 123,329
Other.......................................... -- 18,725
----------- -----------
10,530,645 10,490,110
Less accumulated amortization.................. (7,442,792) (6,827,216)
----------- -----------
$ 3,087,853 $ 3,662,894
=========== ===========
</TABLE>
Patents amortization expense, including abandoned patents, was $637,765 and
$646,607 in 1997 and 1996, respectively. The Series "C" patents were acquired
in August 1995 by the payment of $1,000,000 and the issuance of a $335,134
promissory note what was paid in 1996. Additionally, $18,725 of fully amortized
organizational costs ("Other") were written off in 1997. There was $3,464 of
amortization expense related to these organization costs in 1997.
NOTE 4. INVESTMENT IN KFX FUEL PARTNERS, L.P.
In August 1995, the Company acquired a 5 percent general and limited
partnership interest in 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, 1997, total
construction costs of the facility were approximately $55 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 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.
At December 31, 1996, the Company had $261,714 in accounts receivable due
from KFP for certain construction and start-up costs. These receivables were
included in the "Investment in KFx Fuel Partners, L.P." at December 31, 1997.
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. The Company also
performed $395,679 of technical services for KFP in 1997, these amounts are
included in contract revenues for the period.
F-11
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The KFP facility has encountered several problems delaying the achievement
of optimal commercial operations including (1) a fire on December 24, 1996 which
destroyed one of two oil heating systems that provide the main processing
structure (comprised of four processing vessels) with heat transfer fluid (with
substantially all repair costs anticipated to be reimbursable by KFP insurance
proceeds), (2) construction problems relating to the flow of materials within
the facility, and (3) design and operation of certain pressure-release
equipment. KFP is actively exploring solutions to these problems with
anticipated optimal commercial operations to begin in the third or fourth
quarter of 1998. However, because the technology being developed at the
facility is new and untested, no assurance can be given regarding specific
timing and production levels, or that KFP will be able to correct these problems
and be in full commercial operations in the second quarter of 1998, if at all.
KFP had construction in progress of approximately $55,419,000 and
$44,736,000 and current liabilities of approximately $2,623,000 and $1,893,000
at December 31, 1997 and 1996, respectively. For the years ended December 31,
1997 and 1996, KFP generated no revenues and had no net income. This was a
result of all of KFP's efforts being directed towards start-up of the facility
discussed above.
NOTE 5. THERMO ECOTEK CORPORATION STOCK PURCHASE AGREEMENT
In August 1995, the Company and 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.
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 LLC. Pursuant to the Limited Liability Company Agreement (the
"Agreement"), K-Fuel LLC is intended to 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.
F-12
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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. KAFI funded such research and development costs totaling
approximately $879,000 and $1,440,000 in 1997 and 1996, respectfully, and an
additional $327,000 and $371,000, for certain administrative, marketing and
project development activities in the United States and Indonesia for the same
periods. The Company contributed $334,000 and $386,000 to K-Fuel LLC in 1997 and
1996, respectively, for certain administrative, marketing and project
development activities in the United States and Indonesia. As of December 31,
1997, 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
recognized an expense of $267,977 and $86,572 for its equity share of the
marketing, general and administrative expenses of K-Fuel LLC for 1997 and 1996,
respectively. The Company's investment in K-Fuel LLC at December 31, 1997 was
approximately $224,000.
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.
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 a State of Wyoming royalty. The royalty to Mr. Koppelman will
cease when the cumulative payments to him reach the sum of approximately
$75,222,000. Mr. Koppelman is now deceased and all royalty obligations are held
by his estate.
As consideration for the royalty amendment agreement, the Company paid Mr.
Koppelman $300,000 cash and issued a promissory note for $200,000. 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.
F-13
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 8. DUE TO RELATED PARTIES
Due to related parties consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
-------- --------
<S> <C> <C>
Due to board of directors, payable in cash.................... $ -- $ 27,800
Due to officers of the Company, payable in cash............... 15,062 113,708
Due to KSA Partnership, payable in cash....................... 286,958 286,958
Due to K-Fuel, L.L.C., payable in cash........................ 244,665 250,000
Due to other related parties, payable in cash................. 10,837 29,290
-------- --------
Total related party liabilities............................. $557,522 $707,756
======== ========
</TABLE>
During 1997, the Company wrote off $237,438 in trade and related party
payables.
NOTE 9. LONG-TERM DEBT
Long-term debt consisted of the following
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
--------- ----------
<S> <C> <C>
Unsecured promissory note, interest at 6.5 percent and payable
annually, no principal payments due until maturity
in February 1999................................................ $ 500,000 $ 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........................................ 280,000 300,000
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
Paid in January 1997............................................ -- 100,000
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, paid in August 1997 -- 175,000
--------- ----------
780,000 1,225,000
Less current maturities........................................... (280,000) (115,000)
--------- ----------
$ 500,000 $1,110,000
========= ==========
</TABLE>
Scheduled maturities of long-term debt at December 31, 1997 are as follows:
$280,000 in 1998, and $500,000 in 1999.
The promissory note of $175,000 at December 31, 1996 was issued as part of
a royalty amendment agreement. See Note 7.
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-14
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 10. CONVERTIBLE DEBENTURES
On July 31, 1997, the Company completed a private placement of unsecured
convertible debentures (the "Debentures") totaling $17.0 million. The Debentures
mature in July 2002, and have an annual interest rate of 6.0 percent, payable
semi-annually on January 31 and July 31, commencing on January 31, 1998. The
Debentures are initially convertible into shares of the Company's common stock
at a conversion price of $3.75 per share, beginning on October 30, 1997. On
November 1, 1999, the conversion price will change to be 90 percent of the
average closing price of the Company's common stock (on the American Stock
Exchange or other exchange, if applicable) for the 15 days immediately preceding
November 1, 1999. The conversion price on November 1, 1999 cannot be less than
$3.65 per share, subject to certain adjustments.
The Debentures were offered, sold and delivered only to non-United States
persons outside of the United States pursuant to Regulation S of the Securities
Act of 1933, as amended. Application has been made to list the Debentures on
the Luxembourg Stock Exchange.
In connection with the sale of the Debentures, the Company issued to the
placement agents warrants to purchase 453,333 shares of common stock to the
placement agents. See Note 11.
The net cash proceeds from the sale of the Debentures (approximately $15.1
million) will be used for continued project development efforts for proposed K-
Fuel projects in Indonesia and Turkey, continued project development efforts for
a proposed activated carbon production facility, acquisitions of strategic
businesses or partners capable of enhancing the development of the Company, and
for general corporate purposes.
NOTE 11. STOCKHOLDERS' EQUITY
During 1997, the Company issued 1,250,000 shares of common stock for
$2,500,000 as part of the Stock Purchase Agreement. See Note 5.
In connection with the sale of the Debentures, the Company issued to the
placement agents warrants to purchase 453,333 shares of common stock at an
exercise price of $5.00 per share, expiring in July 2002. The warrants were
valued at $567,000 using the Black-Scholes option-pricing model and are included
in the total debenture offering costs (before 1997 amortization of $205,000) of
$2,435,565.
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.
F-15
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
NOTE 12. 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 percent 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. As a result
of TCK's investment in the Company on January 31, 1997, increasing its ownership
in the Company to in excess of 15 percent, all options issued under the 1992
Plan became fully vested on that date.
F-16
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The 1996 Plan provides for the award to executive officers, non-employee
directors and other key employees and consultants 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.
The following table summarizes the Company's stock option activity for the
three-year period ending December 31, 1997:
<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 12-31-97 PER SHARE
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, 12-31-94 630,000 -- 630,000 $5.02 165,000 $5.38
Granted............ 370,000 -- 370,000 5.19 187,000 5.26
Cancelled.......... (350,000) -- (350,000)
--------- ---------
Balance, 12-31-95 650,000 -- 650,000
Granted............ 350,000 525,500 875,500 6.46 455,100 5.61
Cancelled.......... (30,000) -- (30,000)
--------- --------- ---------
Balance, 12-31-96 970,000 525,500 1,495,500
Granted............ -- 735,000 735,000 3.81 170,000 3.90
Cancelled.......... (268,000) (120,000) (388,000)
--------- --------- --------- ------- -----
Balance, 12-31-97... 702,000 1,140,500 1,842,500 977,100 $5.21
======= =====
Remaining shares
Authorized......... 298,000 359,500 657,500
--------- --------- ---------
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: 1995 - $5.13 to $5.64 per share; 1996 -$5.09
to $7.43 per share; 1997 - $3.75 to $4.28 per share. All stock options granted
under the 1992 Plan and the 1996 Plan in 1995, 1996 and 1997 were at exercise
prices that were not below the fair market value of the Company's common stock
on the date of grant.
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 summarizes 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:
F-17
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995
--------------------------------------------------------
<S> <C> <C> <C>
Net loss - as reported.......................... $(5,095,160) $(5,628,541) $(6,228,720)
Net loss pro forma............................. $(7,959,467) $(6,320,601) $(6,689,280)
Net loss per share - as reported................ $ (.21) $ (.25) $ (.33)
Net loss per share - pro forma.................. $ (.33) $ (.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
=======
Granted in 1997.......... 35,000 7 NA 6.41 % 50.6 %
Granted in 1997.......... 50,000 7 NA 6.39 % 50.4 %
Granted in 1997.......... 525,000 7 NA 6.55 % 50.4 %
Granted in 1997.......... 120,000 5 NA 6.22 % 50.4 %
-------
Total 1997.............. 730,000
=======
</TABLE>
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 former employees of the Company. The following table summarizes
the terms of such grants as of December 31, 1997:
<TABLE>
<CAPTION>
EXERCISABLE
------------------------------
WEIGHTED NUMBER OF WEIGHTED
AVERAGE SHARES AVERAGE
NUMBER OF OPTION PRICE EXERCISABLE OPTION PRICE
SHARES PER SHARE AT 12-31-97 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 $5.00 150,000 5.00
Granted in 1997........................ 150,000 $5.00 -- --
--------- -------
Outstanding at December 31, 1997....... 1,020,000 870,000
=======
Shares authorized and remaining
to be granted in 1998................. 150,000 $5.00
---------
Total granted and authorized........... 1,170,000
=========
</TABLE>
F-18
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The grant of options for 150,000 shares in 1996 is included in the pro
forma effects of SFAS No. 123 for the years 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 13. 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 summarizes the outstanding warrants as of December
31, 1997, 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 1995........... Services 55,000 $4.00 August 2, 1998
Granted in 1995........... Financing 25,000 $4.00 August 2, 1998
Granted in 1995........... Financing 50,000 $4.38 August 2, 1998
Granted in 1996........... Services 100,000 $4.00 November 5, 1999
Granted in 1996........... Services 100,000 $4.00 December 15, 1999
Granted in 1997........... Services 453,333 $3.75 July 31, 2002
-------
783,333
=======
</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.
Warrants granted in 1997 related to the placement of the Convertible Debentures.
See Note 10.
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:
YEAR ENDING DECEMBER 31, Amount Payable
------------------------ --------------
1998 $154,865
1999 116,990
2000 70,147
2001 6,426
Thereafter 2,142
--------
$350,570
========
Rent expense in 1997, 1996, and 1995 was $182,005, $226,025, and $146,436,
respectively.
F-19
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
As part of the restructured bond agreement with the State of Wyoming in
1994, Energy Brothers Holding, Inc., an affiliate of the Company and an officer
and director of the Company executed a promissory note to the State of Wyoming
for $819,000, with annual interest at 6 percent. The Company has agreed to
indemnify both Energy Brothers Holding, Inc. and the officer and director of the
Company to the extent that payments are made to the State of Wyoming under the
agreement.
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.
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. On May 20, 1997, the Court granted the Company's
Motion for Summary Judgment on all claims. Fru-Con has appealed to the 10th
Circuit Court of Appeals. 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.
F-20
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On March 9, 1998, Fidelity and Deposit of Maryland, as subrogee of Walsh
Construction Company, a division of Guy F. Atkinson Company, filed a
construction lien against KFP with respect to the construction of the KFP
Facility in the amount of approximately $5.9 million. It is not possible at
this time to evaluate the merits of the claim or the range of potential loss.
However, 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 of
$872,851 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>
1997 1996
----------- -----------
<S> <C> <C>
Gross deferred tax assets:
Loss carryforwards.................................... $ 7,500,419 $ 6,220,807
Depreciation and amortization......................... 447,315 152,906
Deferred compensation................................. 496,258 508,498
Other................................................. 108,592 116,892
----------- -----------
Gross deferred tax assets.......................... 8,552,584 6,999,103
Deferred tax assets valuation allowance............ (8,552,584) (6,999,103)
----------- -----------
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 not 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 $ 22,060,000 expire in various amounts through
2012.
The Company's total provision for income taxes in 1997, 1996 and 1995 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>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Expected tax on extraordinary item............... $ -- $ -- $ 873,000
Expected tax benefit on loss before income
Taxes and extraordinary item................... (1,732,000) (1,914,000) (2,991,000)
----------- ----------- -----------
Total expected tax provision (benefit)...... (1,732,000) (1,914,000) (2,118,000)
Non-deductible items............................. 27,000 142,000 716,000
Increase (decrease) in valuation allowance....... 1,553,000 1,515,000 1,633,000
Other............................................ 152,000 257,000 (231,000)
----------- ----------- -----------
Total tax provision............................ $ 0 $ 0 $ 0
=========== =========== ===========
</TABLE>
NOTE 16. SUBSEQUENT EVENTS
In January 1998, the Company converted $170,000 of current accounts
payables related to general corporate legal services into a promissory note.
Interest accrues at six percent per annum with quarterly
F-21
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
interest payments beginning on March 31, 1998 and quarterly principal payments
beginning on March 31, 1999. Any unpaid principal and interest is due on
December 31, 2001.
In January 1998, the Company began funding its 12.6 percent interest in
Charco Redondo, LLC, a Texas limited liability company to construct a pilot
phase tertiary crude oil recovery facility that uses heat and pressure to
extract crude oil from shallow reservoir structures. The Company's funding
commitment for the pilot phase is $540,000 which is expected to be completed by
the second half of 1998.
On March 23, 1998, the Company acquired a 60% interest in Pegasus
Technologies, LLC ("Pegasus), an Ohio limited liability company that sells a
computer software product that enhances combustion optimization in coal-fired
electric utility power plants. The acquisition consisted of a cash payment of
$1,600,000 and a $600,000 four-year promissory note. The terms of the note
include annual principal payments of $150,000 each anniversary date of the note
until fully paid in March 2002, and interest at 5.0 percent per annum. In
addition, the Company agreed to provide Pegasus $1,400,000 in working capital
guarantees secured through lines of credit or other financing sources mutually
acceptable to the Company and Pegasus.
F-22
<PAGE>
EXHIBIT 4.2
KFx INC.,
as Obligor
and
FIRST BANK NATIONAL ASSOCIATION,
doing business as
COLORADO NATIONAL BANK,
as Trustee
_________________________
INDENTURE
Dated as of July 25, 1997
-------------------------
U.S.$25,000,000
6% CONVERTIBLE DEBENTURES
DUE 2002
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION............................................ 1
Section 1.1. Definitions.................................................. 1
Section 1.2. Trust Indenture Act.......................................... 13
Section 1.3. Rules of Construction........................................ 13
Section 1.4. Rights of TCK................................................ 14
ARTICLE II FORM OF DEBENTURES................................................ 14
Section 2.1. Forms Generally.............................................. 14
Section 2.2. Forms of Debentures.......................................... 15
Section 2.3. Form of Coupon............................................... 30
Section 2.4. Form of Certificate of Authentication........................ 31
Section 2.5. Form of Conversion Notice.................................... 31
Section 2.6. Restrictive Legends.......................................... 33
ARTICLE III THE SECURITIES.................................................... 34
Section 3.1. Title and Terms.............................................. 34
Section 3.2. Denominations................................................ 34
Section 3.3. Execution, Authentication, Delivery and Dating............... 34
Section 3.4. Global Securities............................................ 35
Section 3.5. Mutilated, Destroyed, Lost and Stolen Debentures and Coupons. 40
Section 3.6. Persons Deemed Owners........................................ 42
Section 3.7. Cancellation................................................. 42
Section 3.8. Computation of Interest...................................... 43
Section 3.9. ISIN, Common Code Or Other Identifying Numbers............... 43
ARTICLE IV REDEMPTION OF SECURITIES.......................................... 43
Section 4.1. Right of Redemption.......................................... 43
Section 4.2. Applicability of Article..................................... 43
Section 4.3. Election to Redeem; Notice to Trustee........................ 43
Section 4.4. Notice of Redemption; Section of Debentures.................. 44
Section 4.5. Deposit of Redemption Price.................................. 44
Section 4.6. Debentures Payable on Redemption Date........................ 45
ARTICLE V CONVERSION OF DEBENTURES.......................................... 46
Section 5.1. Conversion Privilege......................................... 46
Section 5.2. Exercise of Conversion Privilege............................. 46
Section 5.3. Fractions of Shares.......................................... 47
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 5.4. Adjustment of Conversion Price............................... 47
Section 5.5. Notice of Adjustments of Conversion Price.................... 53
Section 5.6. Notice of Certain Corporate Action........................... 53
Section 5.7. Company to Reserve Common Stock.............................. 54
Section 5.8. Taxes on Conversions......................................... 54
Section 5.9. Cancellation of Converted Definitive Debentures.............. 54
Section 5.10. Provisions in Case of Reclassification, Consolidation,
Merger or Sale of Assets..................................... 55
ARTICLE VI COVENANTS......................................................... 56
Section 6.1. Payment of Principal and Interest on Debentures.............. 56
Section 6.2. Maintenance of Offices for Agencies.......................... 56
Section 6.3. Money for Payments to Be Held in Trust....................... 57
Section 6.4. Taxes, Assessments, Governmental Charges and Certain Claims.. 58
Section 6.5. Reporting Requirements....................................... 59
Section 6.6. Books and Records............................................ 59
Section 6.7. Maintenance of Insurance..................................... 59
Section 6.8. Maintenance of Corporate Existence, Properties, Etc.......... 59
Section 6.9. Type of Business............................................. 60
Section 6.10. Merger or Sale of Assets..................................... 60
Section 6.11. Investments.................................................. 60
Section 6.12. Use of Proceeds.............................................. 61
Section 6.13. Dividends, Etc............................................... 61
Section 6.14. Additional Indebtedness...................................... 61
Section 6.15. Limitation on Liens.......................................... 62
Section 6.16. Compliance with Laws, Etc.................................... 62
Section 6.17. Reports from the Company..................................... 62
Section 6.18. Registration and Listing..................................... 63
Section 6.19. Statement by Officers as to Default.......................... 63
Section 6.20. Additional Amounts........................................... 64
ARTICLE VII REMEDIES OF THE TRUSTEE AND HOLDER OF................................
DEBENTURES ON EVENT OF DEFAULT.................................... 65
Section 7.1. Events of Default Defined.................................... 65
Section 7.2. Covenant of Company to Pay to Trustee Whole Amount Due on
Debentures on Default in Payment of Interest, Principal or
Premium...................................................... 68
Section 7.3. Trustee May File Proofs of Claim............................. 69
Section 7.4. Application of Moneys Collected by Trustee................... 70
Section 7.5. Limitation on Suits.......................................... 70
Section 7.6. Unconditional Right of Holders to Receive Principal, Premium
and Interest and to Convert.................................. 71
Section 7.7. Restoration of Rights and Remedies........................... 71
Section 7.8. Rights and Remedies Cumulative............................... 71
Section 7.9. Delay or Omission Not Waiver................................. 72
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 7.10. Rights of Holders of Majority in Principal Amount of
Debentures to Direct Trustee and Waive Defaults.............. 72
Section 7.11. Waiver of Past Defaults...................................... 73
Section 7.12. Undertaking for Costs........................................ 73
Section 7.13. Waiver of Usury, Stay or Extension Laws...................... 73
ARTICLE VIII CONCERNING THE TRUSTEE............................................ 74
Section 8.1. Certain Duties and Responsibilities.......................... 74
Section 8.2. Notice of Defaults........................................... 75
Section 8.3. Rights of Trustee............................................ 75
Section 8.4. Trustee Not Liable for Recitals.............................. 76
Section 8.5. Trustee and Agents May Own Debentures........................ 76
Section 8.6. Trustee Entitled to Compensation, Reimbursement and
Indemnity.................................................... 77
Section 8.7. Right of Trustee to Rely on Certificate of Officers of
Company Where no Other Evidence Specifically Prescribed...... 78
Section 8.8. Moneys Received by Trustee to be Held in Trust............... 78
Section 8.9. Requirements for Eligibility of Trustee...................... 78
Section 8.10. Resignation or Removal of Trustee............................ 78
Section 8.11. Acceptance by Successor Trustee.............................. 80
Section 8.12. Successor to Trustee by Merger, Consolidation or
Succession to Business....................................... 80
Section 8.13. Authenticating Agent......................................... 80
ARTICLE IX CONCERNING THE HOLDERS OF DEBENTURES.............................. 82
Section 9.1. Evidence of Action by Holders of Debentures.................. 82
Section 9.2. Proof of Execution of Instruments and of Holding of
Debentures................................................... 83
Section 9.3. Action by Holder of Debenture Binds Future Holders........... 84
ARTICLE X MEETINGS.......................................................... 85
Section 10.1. Purposes for Which Meetings May be Called.................... 85
Section 10.2. Manner of Calling Meetings................................... 85
Section 10.3. Call of Meetings by Company or Holders of Debentures......... 85
Section 10.4. Persons Entitled to Vote at Meetings......................... 86
Section 10.5. Determination of Voting Rights, Control and Adjournment of
Meetings..................................................... 86
Section 10.6. Manner of Voting at Meetings and Record to be Kept........... 87
Section 10.7. Exercise of Rights of Trustee or Holders of Debentures May
Not be Hindered or Delayed by Call of Meeting of Holders of
Debentures................................................... 88
ARTICLE XI SUPPLEMENTAL INDENTURES........................................... 88
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Section 11.1. Purposes for Which Supplemental Indentures May be Entered
into Without Consent of Holders of Debentures............... 88
Section 11.2. Modification of Indenture with Consent of Holders of a
Majority in Principal Amount of Debentures.................. 89
Section 11.3. Effect of Supplemental Indentures........................... 90
Section 11.4. Debentures May Bear Notation of Changes..................... 91
Section 11.5. Opinion of Counsel.......................................... 91
Section 11.6. Notice of Supplemental Indentures........................... 91
Section 11.7. Consent of TCK.............................................. 91
ARTICLE XII CONSOLIDATION OR MERGER.......................................... 92
Section 12.1. When Company May Merge, Etc................................. 92
Section 12.2. Successor Corporation....................................... 93
ARTICLE XIII SATISFACTION AND DISCHARGE OF INDENTURE;
DEPOSITED MONEYS............................................ 93
Section 13.1. Satisfaction and Discharge of Indenture..................... 93
Section 13.2. Application by Trustee of Funds Deposited for Payment of
Debentures.................................................. 94
Section 13.3. Repayment of Moneys Held by Paying Agent.................... 94
Section 13.4. Moneys Deposited for Redemption of Debentures Subsequently
Converted to be Returned to Company......................... 95
Section 13.5. Payment of Deposited Money to Company After Lapse of Time... 95
ARTICLE XIV IMMUNITY OF INCORPORATORS, STOCKHOLDERS,
OFFICERS AND DIRECTORS........................................... 95
ARTICLE XV RIGHT TO REQUIRE REPURCHASE................................. 96
Section 15.1. Right to Require Repurchase................................. 96
Section 15.2. Notice; Method of Exercising Repurchase Right............... 96
Section 15.3. Deposit of Repurchase Price................................. 98
ARTICLE XVI MISCELLANEOUS PROVISIONS......................................... 98
Section 16.1. Successors and Assigns of Company Bound by Indenture........ 98
Section 16.2. Acts of Board, Committee or Officer of Successor Corporation
Valid....................................................... 99
Section 16.3. [Intentionally Omitted]..................................... 99
Section 16.4. Notices, Etc. to Trustee and Company........................ 99
Section 16.5. Notice to Holders of Debentures; Waiver..................... 99
Section 16.6. Effect of Headings and Table of Contents.................... 100
Section 16.7. Indenture and Debentures to be Construed in Accordance with
Laws of State of New York................................... 100
Section 16.8. Officers' Certificate and Opinion of Counsel to be Furnished
upon Applications or Demands by Company..................... 100
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Section 16.9. Benefits of Indenture....................................... 102
Section 16.10. Legal Holidays.............................................. 102
Section 16.11. Effect of Invalidity of Provisions.......................... 102
Section 16.12. Execution in Counterparts................................... 102
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Exhibit 4.2
INDENTURE, dated as of July 25, 1997, between KFx Inc., a Delaware
corporation (the "Company"), and First Bank National Association, doing business
as Colorado National Bank, a national banking association authorized to exercise
corporate trust power, as Trustee (the "Trustee").
RECITALS OF THE COMPANY
WHEREAS, for its lawful corporate purposes, the Company has duly
authorized the creation of an issue of its 6% Convertible Debentures due 2002
(the "Debentures") and the coupons thereto appertaining of substantially the
same tenor and amount hereinafter set forth, and to provide therefor the Company
has duly authorized the execution and delivery of this Indenture; and
WHEREAS, all acts and things necessary have been done by the Company
to make the Debentures, when executed by the Company and authenticated and
delivered hereunder and duly issued by the Company upon payment therefor by the
purchasers thereof, the valid obligations of the Company, and to make this
Indenture a valid agreement of the Company, in accordance with their and its
terms;
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
In order to declare the terms and conditions upon which the Debentures
and the coupons thereto appertaining are, and are to be authenticated, issued
and delivered, and for and in consideration of the premises and the purchase of
the Debentures by the holders thereof ("Holders"), it is mutually covenanted and
agreed, for the equal and proportionate benefit of all Holders of the Debentures
as follows:
ARTICLE I
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
Section I.1. Definitions.
-----------
"Additional Amounts" has the meaning specified in the form of
Definitive Debenture set forth in Section 2.2(a).
"Affiliate" means, when used with reference to any specified Person,
any other Person directly or indirectly controlling, controlled by, or under
direct or indirect common control with, such specified Person. For the purposes
of this definition, "control" when used with respect to any Person means the
power to direct or cause the direction of the management or policies of such
Person, directly or indirectly, whether through the ownership or voting
<PAGE>
securities, by contract or otherwise, and the terms "controlling" and
"controlled" have meanings correlative of the foregoing.
"AMEX" means the American Stock Exchange.
"Applicable Procedures" means, with respect to any transfer or
transaction involving a Global Debenture or beneficial interest therein the
rules and procedures of Euroclear or Cedel and of the Common Depositary, in each
case to the extent applicable to such transaction as in effect from time to
time.
"Authorized Newspaper" means, so long as the Debentures are listed on
a securities exchange and such exchange so requires, a newspaper published in
the city in which such securities exchange is located; provided that publication
in London, England shall be in the Financial Times and for so long as the
---------------
Debentures are listed on the Luxembourg Stock Exchange, "Authorized Newspaper"
shall include the Luxembourg Wort; provided, further, that if, because of
---------------
temporary or permanent suspension of publication or general circulation of any
newspaper or for any other reason, it is impossible or, in the opinion of the
Trustee, impracticable to make reasonable publication of any notice required
herein in a newspaper published in the city in which the securities exchange is
located, then "Authorized Newspaper" shall mean any publication in an English
language newspaper of general circulation.
"Authenticating Agent" means any Person authorized pursuant to Section
8.13 to act on behalf of the Trustee to authenticate Debentures.
"Bankruptcy Code" means the Bankruptcy Code of 1978, as amended (11
U.S.C. 101 et seq.).
"Board of Directors" means either the Board of Directors of the
Company or any duly authorized committee of such Board of Directors.
"Board Resolution" means a resolution duly adopted by the Board of
Directors, a copy of which certified by the Secretary or an Assistant Secretary
of the Company to have been duly adopted by the Board of Directors and to be in
full force and effect on the date of such certification, shall have been
delivered to the Trustee.
"Business Day" means any day other than a Saturday, a Sunday or a day
on which banking institutions are authorized or obligated by law, executive
order or regulation to close, in Denver, Colorado and, with respect to any
payment on the Debentures or the Coupons, or conversion of Debentures, if there
is a Paying Agent or Conversion Agent in Luxembourg, in Luxembourg and, with
respect to any other place of payment or conversion, in such other place of
payment or conversion.
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<PAGE>
"Capitalized Lease Obligations" means, with respect to any Person, any
Indebtedness of such Person represented by obligations under a lease or other
rental agreement that are required to be capitalized for financial reporting
purposes in accordance with GAAP, and the amount of such Indebtedness for
purposes hereof shall be the capitalized amount of such obligations as
determined in accordance with GAAP on a consolidated basis.
"Cedel" means Cedel Bank Societe Anonyme.
"Change of Control" has the meaning specified in the form of
Definitive Debenture set forth in Section 15.1.
"Closing Price Per Share" means, with respect to the Common Stock of
the Company, for any day, the reported last sales price regular way per share
or, in case no such reported sale takes place on such day, the average of the
reported closing bid and asked prices regular way, in either case (i) on the
American Stock Exchange, as reported in The Wall Street Journal (or other
similar newspaper) or, if the Common Stock is not listed or admitted to trading
on such Exchange, on the principal (as determined by the Company's Board of
Directors) national securities exchange on which the Common Stock is listed or
admitted to trading, or (ii) if not listed or admitted to trading on any
national securities exchange or quoted on the Nasdaq National Market, the
average of the closing bid and asked prices in the over-the-counter market as
furnished by any New York Stock Exchange member firm selected from time to time
by the Company for that purpose. If no such prices are available, the Closing
Price Per Share shall be the fair value of a share as determined by the Board of
Directors of the Company.
"Code" means the United States Internal Revenue Code of 1986, as
amended from time to time, and the rules and regulations promulgated thereunder
and any successor statute thereto.
"Commission" means the Securities and Exchange Commission.
"Common Depositary" has the meaning specified in Section 3.4.
"Common Stock" or "Shares" means the Common Stock, $.001 par value, of
the Company as presently authorized by its Certificate of Incorporation or any
other stock of the Company into which such Common Stock may hereafter be changed
from time to time.
"Company" means the Person named as such in the first paragraph of
this Indenture, until a successor Person shall have become such pursuant to the
applicable provisions of this Indenture, and thereafter "Company" shall mean
such successor Person.
"Company Notice" has the meaning specified in Section 15.2(a).
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<PAGE>
"Company Request" or "Company Order" means a written request or order
signed in the name of the Company by an Officer and delivered to the Trustee.
"Continuing Director" means, at any date, a member of the Board of
Directors who (i) was a member of the Board of Directors for the period of 24
months prior to such date or (ii) was nominated for election or elected to the
Board of Directors with the affirmative vote of at least two-thirds of the
Continuing Directors.
"Contractual Obligation" of any Person means any provision of any
agreement, instrument, Security or undertaking to which such Person is a party
or by which it or any of the property owned by it is bound.
"Conversion Agent" means any Person authorized by the Company to
convert Debentures in accordance with Article V. Initially, the Company has
appointed Banque Internationale A Luxembourg as its Conversion Agent in
Luxembourg.
"Conversion Date" has the meaning specified in Section 5.2.
"Conversion Notice" has the meaning specified in Section 5.2.
"Conversion Price" has the meaning specified in the form of Definitive
Debenture set forth in Section 2.2(a).
"Conversion Shares" has the meaning specified in the form of
Definitive Debenture set forth in Section 2.2(a).
"Convertible Securities" has the meaning specified in Section 5.4(e).
"Corporate Trust Office" means the office of the Trustee at which at
any particular time its corporate trust business shall be principally
administered (which at the date of this Indenture is located at Suite 2450, 950
17th Street, Denver, Colorado 80202 and 180 East Fifth Street, St. Paul,
Minnesota 55101).
"Coupon" means any interest coupon appertaining to a Definitive
Debenture issued in the form set forth in Section 2.3.
"Debentures" has the meaning specified in the first recital of this
Indenture and more particularly means any of the Debentures authenticated and
delivered under this Indenture.
"Definitive Debenture" means any Debenture issued in the form set
forth in Section 2.2(a).
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<PAGE>
"Default" means any event, act or condition, the occurrence of which
is, or after notice or the passage of time or both would be, an Event of
Default.
"Determination Notice" has the meaning specified in the form of
Definitive Debenture set forth in Section 2.2(a).
"Dollar," "U.S.$," "United States dollar" or the sign "$" means a
Dollar or other equivalent unit in such coin or currency of the United States as
at the time shall be legal tender for the payment of public and private debts.
"Euroclear" means Morgan Guaranty Trust Company of New York, Brussels
Office, as operator of the Euroclear Clearance System.
"Event of Default" has the meaning specified in Section 7.1.
"Exchange Act" means the United States Securities Exchange Act of
1934, as amended from time to time, and the rules and regulations promulgated
thereunder, and any successor statute thereto.
"Exchange Date" means the date which is 40 days after the Final
Closing Date.
"Existing Control Group" means the Persons listed under the caption
"Principal Shareholders" in the Offering Memorandum.
"Final Closing Date" means the last date on which a sale of the
Debentures is closed pursuant to the Offering Memorandum.
"Floor" has the meaning specified in the form of Definitive Debenture
set forth in Section 2.2(a).
"GAAP" means generally accepted accounting principles set forth in the
opinions of the Accounting Principles Board of the American Institute of
Certified Public Accountants and the statements and pronouncements of the
Financial Accounting Standards Board or such other statements by any such other
entity as may be approved by a significant segment of the accounting profession
in the United States, and which are applicable to the circumstances as of the
date of this Indenture.
"Global Debenture" means any Debenture issued in the form set forth in
Section 2.2(b).
"Guaranty" means any Contractual Obligation, contingent or otherwise,
of a Person with respect to any Indebtedness or other obligation or liability of
another Person, including without limitation, any such Indebtedness, obligation
or liability directly or indirectly
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<PAGE>
guaranteed, endorsed, co-made or discounted or sold with recourse by that
Person, or in respect of which that Person is otherwise directly or indirectly
liable, including Contractual Obligations (contingent or otherwise) arising
through any agreement to purchase, repurchase, or otherwise acquire such
Indebtedness, obligation or liability or any security therefor, or any agreement
to provide funds for the payment or discharge thereof (whether in the form of
loans, advances, stock purchases, capital contributions or otherwise), or to
maintain solvency, assets, level of income, or other financial condition, or to
make any payment other than for value received.
"Holder" means, when used with respect to a Debenture, the bearer
thereof, and when used with respect to a Coupon, the bearer thereof.
"Indebtedness" means (a) any liability of any Person (i) for borrowed
money or (ii) evidenced by a note, debenture or similar instrument (including a
purchase money obligation and a letter of credit), whether issued in connection
with the acquisition of any assets (other than inventory or similar property
acquired in the ordinary course of business) or otherwise; (b) Capitalized Lease
Obligations of any Person; (c) any Guaranty of any liability of others described
in clause (a) or (b) above, and (d) any amendment, renewal, extension or
refunding of any liability of the types referred to in clauses (a), (b) and (c)
above.
"Indenture" means this instrument as originally executed or as it may
from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof,
including, for all purposes of this instrument and any such supplemental
indenture.
"Initial Closing Date" means the first date on which a sale of
Debentures is closed pursuant to the Offering Memorandum.
"Interest Payment Date" has the meaning specified in the form of
Definitive Debenture set forth in Section 2.2(a).
"Lien" means any mortgage, pledge, security interest, security
deposit, encumbrance, lien or charge of any kind, including any agreement to
give any of the foregoing, any conditional sale or other title retention
agreement, any lease in the nature thereof, and the filing of or agreement to
give any financing statement under the Uniform Commercial Code of any applicable
jurisdiction.
"Luxembourg Agent" means, as the context requires, Banque
Internationale A Luxembourg in its capacity as Paying Agent, Conversion Agent or
Transfer Agent for the Company in Luxembourg.
"Luxembourg Stock Exchange" means the Bourse de Luxembourg.
-6-
<PAGE>
"Maturity Date" has the meaning specified in the form of Definitive
Debenture set forth in Section 2.2(a).
"Offering Memorandum" means the final Offering Memorandum dated July
25, 1997 pursuant to which the Debentures were initially offered and sold.
"Officer" means any of the following officers of the Company: the
chairman of the board of directors, the president, the chief executive officer,
any vice president, the chief financial officer or the secretary.
"Officers' Certificate" means a certificate signed by two Officers or
by an Officer and an assistant treasurer or an assistant secretary of the
Company.
"Opinion of Counsel" means a written opinion from independent legal
counsel who is reasonably acceptable to the Trustee.
"Outstanding" means, with respect to the Debentures as of the date of
determination, all Debentures theretofore authenticated and delivered under this
Indenture, except:
(a) Debentures theretofore cancelled by the Trustee or delivered
to the Trustee for cancellation;
(b) Debentures, or portions thereof, for whose payment money or
Securities in the necessary amount has been theretofore deposited with the
Trustee or any Paying Agent (other than the Company) in trust or set aside and
segregated in trust by the Company (if the Company shall act as its own Paying
Agent) for the Holders of such Debentures; provided that, if such Debentures are
to be redeemed (as provided in Article IV), notice of such redemption has been
duly given pursuant to this Indenture or provision therefor satisfactory to the
Trustee has been made; and
(c) Debentures in exchange for or in lieu of which other
Debentures have been authenticated and delivered pursuant to this Indenture;
provided that in determining whether the Holders of the requisite principal
amount of Outstanding Debentures have given any request, demand, authorization,
direction, notice, consent or waiver hereunder, Debentures owned by the Company
or any Affiliate of the Company shall be disregarded and deemed not to be
Outstanding, except that, in determining whether the Trustee shall be protected
in relying upon such request, demand, authorization, direction, notice, consent
or waiver, only Debentures that the Trustee knows to be so owned shall be so
disregarded. Debentures so owned that have been pledged in good faith may be
regarded as Outstanding if the pledgee establishes to the satisfaction of the
Trustee the pledgee's right so
-7-
<PAGE>
to act with respect to such Debentures and that the pledgee is not the Company
or an Affiliate of the Company.
"Paying Agent" means any person authorized by the Company to pay the
principal of, premium, if any, or interest on, any Debentures on behalf of the
Company, and except as otherwise specifically set forth herein, such term shall
include the Company, if it acts as its own paying agent. The Company has
initially appointed Banque Internationale A Luxembourg as its Paying Agent in
Luxembourg.
"Permitted Liens" means with respect to the Company or any Subsidiary:
(a) deposits and pledges in the ordinary course of business in
compliance with workmen's compensation, unemployment insurance and other social
security legislation and regulations;
(b) deposits to secure the performance of bids, trade contracts
(other than for Indebtedness), leases (other than Capital Lease Obligations),
statutory obligations, surety, appeal and performance bonds and other
obligations of a like nature incurred in the ordinary course of business;
(c) Liens for taxes not yet delinquent or the validity or amount of
which are being diligently contested in good faith by appropriate proceedings
and as to which the Company or such Subsidiary has established appropriate
reserves on its books in conformity with GAAP, and in case a proceeding to
foreclose any such Lien has been commenced, such foreclosure proceeding has been
stayed or bonded pending the final resolution of the proceedings commenced by
the Company or such Subsidiary;
(d) carrier's, warehousemen's, mechanic's, materialmen's, repairmen's
or other like Liens arising in the ordinary course of business not overdue or
the validity or amount of which are being diligently contested in good faith by
appropriate proceedings and as to which the Company or such Subsidiary has
established appropriate reserves on its books in conformity with GAAP, and in
case a proceeding to foreclose any such Lien has been commenced, such
foreclosure proceeding has been stayed or bonded pending the final resolution of
the proceedings commenced by the Company or such Subsidiary;
(e) purchase money security interests in real property, improvements
thereto or equipment hereafter acquired or constructed by the Company or such
Subsidiary; provided that (i) such security interests secure Project Finance
Indebtedness, (ii) such security interests are incurred, and the Project Finance
Indebtedness secured thereby is created, no later than 90 days after such
acquisition or construction, (iii) the Project Finance Indebtedness secured
thereby does not exceed 100% of the purchase price of such real property,
improvements or equipment at the time of such acquisition or construction, (iv)
such security interests do not apply to any other property or assets of the
Company or such Subsidiary, or (v) at the time of creating or otherwise
-8-
<PAGE>
incurring such security interest, and after giving effect thereto, the Company
is in compliance with all of its other covenants under this Indenture;
(f) Liens on assets of the Company or any of its Subsidiaries
existing on the date hereof; provided such Liens shall secure only the
obligation which they secure on the date hereof, and such Liens may be extended
or renewed;
(g) security interests in royalties, licensing, management,
consulting and other fees, revenues and payments receivable by, or to become
payable to, the Company and/or any of its Subsidiaries under or pursuant to
contracts, agreements or arrangements arising out of, related to or connected
with a Strategic Alliance, securing Project Finance Indebtedness related to such
Strategic Alliance; and
(h) security interests in process or feedstock contracts entered into
in connection with a Strategic Alliance by the Company or one of its
Subsidiaries securing Project Finance Indebtedness related to such Strategic
Alliance.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Placement Agents" means BlueStone Capital Partners, L.P. and
Jefferies International Limited.
"Predecessor Debenture" of any particular Debenture means every
previous Debenture evidencing all or a portion of the same debt as that
evidenced by such particular Debenture; and, for the purposes of this
definition, any Debenture authenticated and delivered under Section 3.7 in
exchange for or in lieu of a mutilated, lost, destroyed or stolen Debenture
shall be deemed to evidence the same debt as the mutilated, lost, destroyed or
stolen Debenture.
"Project Finance Indebtedness" means Capitalized Lease Obligations and
Indebtedness used to finance the acquisition, installation and/or construction
of capital assets of the Company and/or a Subsidiary and/or a Strategic
Alliance.
"Redemption Date", when used with respect to any Debenture to be
redeemed, means the date fixed for such redemption by or pursuant to this
Indenture.
"Redemption Price", when used with respect to any Debenture to be
redeemed, means the price at which it is to be redeemed pursuant to this
Indenture.
"Regulation S" means Regulation S under the Securities Act and any
successor regulation thereto.
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<PAGE>
"Repurchase Date" has the meaning specified in Section 15.1.
"Repurchase Price" has the meaning specified in Section 15.2.
"Requirement of Law" for any Person means the articles or certificate
of incorporation and by-laws or other organizational or governing documents of
such Person and any law, treaty, rule or regulation, or determination of an
arbitrator or a court or other governmental authority, in each case applicable
to or binding upon such Person or any of its property or to which such Person or
any of its property is subject.
"Responsible Officer" means, with respect to the Trustee, the chairman
or vice-chairman of the board of directors or trustees, the chairman of the
executive committee, the chairman of the trust committee, the president, any
vice-president, the secretary, the treasurer, any trust officer, the cashier,
any second or assistant vice-president, any assistant trust officer, any
assistant secretary, any assistant treasurer, any assistant cashier, or any
other officer or assistant officer of the Trustee customarily performing such
functions similar to those performed by the Persons who at the time shall be
such officers, respectively, or to whom any corporate trust matter is referred
because of his knowledge of and familiarity with the particular subject.
"Reset Conversion Date" has the meaning specified in the form of
Definitive Debenture set forth in Section 2.2(a).
"Securities Act" means the United States Securities Act of 1933, as
amended, and any successor statute.
"Security" shall have the same meaning as in Section 2(1) of the
Securities Act.
"Stock Price Factor" has the meaning specified in the form of
Definitive Debenture set forth in Section 2.2(a).
"Strategic Alliance" means a joint venture or other agreement or
arrangement between or among the Company and/or one or more of its Subsidiaries
and one or more third parties seeking to advance and commercialize business
opportunities arising out of technologies owned or licensed by the Company or
any of its Subsidiaries, including research and development, sublicensing,
marketing and consulting in relation to such technologies and construction and
operation of facilities utilizing such technologies.
"Subsidiary" means, with respect to any Person, (i) any corporation of
which 51% or more of the combined voting power of the outstanding Voting Stock
is owned, directly or indirectly, by such Person or by one or more other
Subsidiaries of such Person or by such Person and one or more Subsidiaries
thereof or (ii) any other Person (other than a corporation) in which such
Person, or one or more other Subsidiaries of such Person or such Person and one
or more other Subsidiaries thereof, directly or indirectly, has at least a
majority ownership and power to
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direct the policies, management and affairs thereof. Unless otherwise specified,
"Subsidiary" means a Subsidiary of the Company.
"Taxes" means any current or future taxes, levies, imposts, duties,
fees, assessments, deductions, withholdings or other charges of whatever nature,
including, without limitation income, gross receipts, excise, property, sales,
transfer, license, payroll, withholding, social security, and franchise taxes,
now or hereafter imposed or levied by the United States of America or any state,
local or foreign government or by any department, agency or other political
subdivision or taxing authority thereof or therein and all interest, penalties,
additions to tax and other similar liabilities with respect thereto.
"Tax Law Change" means (a) any change in, or amendment to, the laws
(including any regulations or rulings promulgated thereunder) of the United
States or any political subdivision or taxing authority thereof or therein
affecting taxation, or any change in, or amendment to, the application or
official interpretation of such laws, regulations or rulings, or (b) any written
assertion by the United States Internal Revenue Service that the Debentures are
not properly characterized as debt.
"TCK" means Thermo Ecotek Corporation, a majority-owned subsidiary of
Thermo Electron Corporation.
"Transfer Agent" has the meaning specified in Section 2.2(a). The
Company has initially appointed Banque Internationale A Luxembourg as its
Transfer Agent in Luxembourg.
"Trading Days" means (i) if the Common Stock is listed or admitted for
trading on any national securities exchange, days on which such national
exchange is open for business or (ii) if the Common Stock is quoted on the
Nasdaq National Market or any similar system of automated dissemination of
quotations of securities prices, days on which trades may be made on such system
or (ii) if the Common Stock is not listed or admitted to trading on any national
securities exchange or quoted on the Nasdaq National Market or similar system,
days on which the Common Stock is traded regular way in the over-the-counter
market and for which a closing bid and closing asked price for the Common Stock
are available.
"Trust Indenture Act" means the United States Trust Indenture Act of
1939 including any successor act thereto, as it may be amended from time to
time, and includes the rules and regulations of the Commission thereunder.
"Trustee" means the Person named as the "Trustee" in the first
paragraph of this instrument until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor Trustee.
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"United States" means the United States of America (including the
States thereof and the District of Columbia), its territories, its possessions
and other areas subject to its jurisdiction.
"United States Alien" means any Person who, as to the United States,
is a foreign corporation, a nonresident alien individual, a non-resident alien
fiduciary of a foreign estate or trust, or a foreign partnership, one or more of
the members of which is, as to the United States, a foreign corporation, a non-
resident alien individual, or a non-resident alien fiduciary of a foreign estate
or trust.
"United States Person" means (1) any natural person resident in the
United States, (2) any partnership or corporation organized or incorporated
under the laws of the United States, (3) any estate of which any executor or
administrator is a United States Person, (4) any trust of which any trustee is a
United States Person, (5) any agency or branch of a foreign entity located in
the United States, (6) any non-discretionary account or similar account (other
than an estate or trust) held by a dealer or other fiduciary organized,
incorporated or (if an individual) resident in the United States and (7) any
partnership or corporation if (i) organized or incorporated under the laws of
any foreign jurisdiction and (ii) formed by a United States Person principally
for the purpose of investing in securities not registered under the Securities
Act, unless it is organized or incorporated, and owned, by accredited investors
(as defined in Rule 501(a) of the Securities Act) who are not natural persons,
estates or trusts.
"Vice President," when used with respect to the Company, means any
Vice President, whether designated by a number or word or words added before or
after the title "Vice President."
"Voting Stock" means the securities of any class or classes of the
Company the holders of which are ordinarily, in the absence of contingencies,
entitled to elect a majority of the corporate directors of such corporation or
Persons performing similar functions.
"Warrant A" means the currently outstanding warrant issued by the
Company to TCK to purchase 7,750,000 shares of Common Stock (subject to
adjustment), exercisable in whole or in part during the period commencing
January 1, 2000 and expiring July 1, 2001, at an exercise price of $3.65 per
share, subject to adjustment, and any warrant or warrants issued in substitution
or exchange therefor.
"Warrant B" has the meaning specified in Section 6.10(e).
"Western Europe" means Austria, Belgium, Denmark, France, Germany,
Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain,
Sweden, Switzerland and the United Kingdom.
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Section I.2. Trust Indenture Act.
-------------------
This Indenture has not been registered under, and is not subject to
any of the protections of, the Trust Indenture Act.
Section I.3. Rules of Construction.
---------------------
For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:
(1) the terms defined in this Article have the meanings assigned
to them in this Article, and include the plural as well as the singular;
(2) all accounting terms not otherwise defined herein have the
meaning assigned to them in accordance with GAAP;
(3) all other terms used herein which are defined in the Trust
Indenture Act, or which are incorporated by reference in such Act or are defined
in the Securities Act, have the meanings assigned to them therein;
(4) unless the context otherwise requires, any reference to an
"Article" or a "Section" refers to an Article or a Section, as the case may be,
of this Indenture;
(5) "or" is not exclusive;
(6) the words "herein," "hereof" and "hereunder" and other words
of similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision; and
(7) provisions of this Indenture and of the Debentures apply to
successive events and transactions.
Section I.4. Rights of TCK. For all purposes of this Indenture,
-------------
nothing in this Indenture shall be deemed to restrict or prohibit the exercise
by TCK of its rights under the Stock Purchase Agreement, Warrant A and Warrant B
and the KFx Fuel Partners L.P. Agreement.
ARTICLE II
FORM OF DEBENTURES
Section II.1. Forms Generally.
---------------
The Debentures and the Coupons shall be in substantially the forms set
forth in this Article, with such appropriate insertions, omissions,
substitutions and other variations as are
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required or permitted by this Indenture, and may have such letters, numbers or
other marks of identification and such legends or endorsements placed thereon as
may be required to comply with the rules of any securities exchange, the Code,
or as may, consistently herewith, be determined by the officers of the Company
executing such Debentures and Coupons, as evidenced by their execution thereof.
The Trustee's certificates of authentication shall be in substantially the form
set forth in Section 2.4 and Conversion Notices shall be in substantially the
form set forth in Section 2.5.
A Global Debenture may be printed, lithographed, typewritten,
mimeographed or otherwise produced, as determined by the officers of the Company
executing such Global Debenture, as evidenced by their execution thereof.
The Definitive Debentures and Coupons shall be printed, lithographed
or engraved or produced by any combination of these methods on steel engraved
borders or may be produced in any other manner permitted by the rules of any
securities exchange on which the Debentures may be listed, all as determined by
the officers executing the Definitive Debentures and Coupons, as evidenced by
their execution thereof. The format and spacing of the text of a Definitive
Debenture or Coupon may be varied to facilitate such production.
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Section II.2. Forms of Debentures.
-------------------
(a) Form of Definitive Debenture
[FORM OF FACE]
KFx Inc.
6% CONVERTIBLE DEBENTURE DUE 2002
No. __________ U.S. $10,000
Debenture ISIN XS0078387601
Common Code 7838760
KFx Inc., a corporation duly organized and existing under the laws of
the State of Delaware (the "Company"), for value received, hereby promises to
pay to bearer, upon presentation and surrender of this Debenture, an amount
equal to 112% of the principal sum of Ten Thousand United States Dollars on the
date in the year 2002 which is five Business Days prior to the fifth anniversary
of the Initial Closing Date (the "Maturity Date") and to pay interest on such
principal sum, from the Initial Closing Date, or from the most recent Interest
Payment Date (as defined below) to which interest has been paid or duly provided
for, semi-annually in arrears on January 31 and July 31 in each year (an
"Interest Payment Date"), commencing January 31, 1998, at the rate of 6% per
annum, until the principal hereof and premium, if any, is due, and at the rate
of 8% per annum on any overdue principal and, to the extent permitted by law, on
any overdue interest. Such payments shall be made, subject to any laws or
regulations applicable thereto and to the right of the Company (limited as
provided in the Indenture) to terminate the appointment of any such Paying
Agent, at the option of the Holder, at the principal office of Banque
Internationale A Luxembourg, Luxembourg, or at such other offices or agencies
outside the United States (as defined below) as the Company may designate, at
the option of the Holder, by a United States Dollar check drawn on a bank in the
City of New York or by transfer of United States Dollars to an account
maintained by the Holder with a bank located outside the United States, provided
that such Holder shall have furnished wire transfer instructions in writing to
the Paying Agent by no later than five days prior to the relevant payment date.
Interest on this Debenture due on or before the Maturity Date shall be payable
only upon presentation and surrender at such an office or agency of the Coupons
hereto attached as they severally mature. No payment of principal of, premium,
if any, or interest on, including Additional Amounts (as defined below) with
respect to, this Debenture shall be made at the Corporate Trust Office of the
Trustee under the Indenture referred to on the reverse hereof or at any other
office or agency of the Company in the United States or by check mailed to any
address in the United States or by transfer to an account maintained with a bank
located in the United States; provided, however, that payment of principal of,
premium, if any, or interest on this Debenture and payment of any
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such Additional Amounts may be made at an office of the Paying Agent in the
United States, if (but only if) payment of the full amount of such principal,
premium, if any, interest or Additional Amounts, as the case may be, at all
offices outside the United States maintained for such purpose by the Company in
accordance with the Indenture is illegal or effectively precluded by exchange
controls or other similar restrictions on the full payment or receipt of such
amounts in United States Dollars, as determined by the Company.
Subject to the terms of the Indenture, the Company will pay to the
Holder of this Debenture or any Coupon, who is not a "United States Person" such
additional amounts ("Additional Amounts") as may be necessary in order that
every net payment of the principal of, premium, if any, and interest on this
Debenture (including payment on redemption or repurchase), after deduction or
withholding for or on account of any present or future tax assessment or
governmental charge imposed upon or as a result of such payment by the United
States or any political subdivision or taxing authority thereof or therein, will
not be less than the amount provided for in this Debenture or in such Coupon to
be then due and payable; provided, however, that the foregoing obligation to pay
Additional Amounts will not apply to:
(a) any tax, assessment or other governmental charge which would not
have been so imposed but for (i) the existence of any present or former
connection between such Holder (or between a fiduciary, settlor,
beneficiary, member, shareholder of or possessor of a power over such
Holder, if such Holder is an estate, a trust, a partnership or a
corporation) and the United States or any political subdivision or taxing
authority thereof or therein, including, without limitation, such Holder
(or such fiduciary, settlor, beneficiary, member, shareholder or possessor)
being or having been a citizen or resident of the United States or treated
as a resident thereof, or being or having been engaged in trade or business
or present therein, or having a permanent establishment therein, or (ii)
such Holder's present or former status as a personal holding company, a
foreign personal holding company with respect to the United States, a
controlled foreign corporation or a passive foreign investment company for
United States tax purposes or a corporation which accumulates earnings to
avoid United States federal income tax;
(b) any tax, assessment or other governmental charge which would not
have been so imposed but for the presentation by the Holder of this
Debenture or any Coupon for payment on a date more than 15 days after the
date on which such payment became due and payable or the date on which
payment thereof is duly provided for, whichever occurs later;
(c) any estate, inheritance, gift, sales, transfer, personal property
or similar tax, assessment or governmental charge;
(d) any tax, assessment or other governmental charge which would not
have been imposed but for the failure to comply with any certification,
identification or other reporting requirements concerning the nationality,
residence, identity or connection with
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the United States of the Holder or beneficial owner of this Debenture or
any Coupon appertaining hereto, if compliance is required by statute or by
regulation of the United States Treasury Department as a precondition to
exemption from such tax, assessment or other governmental charge;
(e) any tax, assessment or other governmental charge which is payable
otherwise than by deduction or withholding from payments of principal of or
interest on this Debenture;
(f) any tax, assessment or other governmental charge imposed as a
result of a Person's past or present actual or constructive ownership,
including by virtue of the right to convert Debentures, of 10% or more of
the total combined voting power of all classes of stock of the Company
entitled to vote;
(g) any tax, assessment or other governmental charge required to be
withheld by any Paying Agent from any payment of the principal of or
interest on this Debenture, if such payment can be made without such
withholding by any other Paying Agent in Western Europe;
(h) any tax, assessment or other governmental charge imposed on a
Holder that is not the sole beneficial owner of this Debenture or that is a
partnership or a fiduciary, but only to the extent that any beneficial
owner or member of the partnership or beneficiary or settlor with respect
to the fiduciary would not have been entitled to the payment of Additional
Amounts had the beneficial owner or member directly received its beneficial
or distributive share of payments on this Debenture; or
(i) any combination of items (a), (b), (c), (d), (e), (f), (g) and
(h).
Notwithstanding the foregoing, if and so long as a certification,
identification or other information reporting requirement referred to in the
fourth paragraph of the reverse hereof would be fully satisfied by payment of a
backup withholding tax or similar charge, the Company may elect, by so stating
in the Determination Notice (as defined on the reverse hereof), to have the
provisions of this paragraph apply in lieu of the provisions of such paragraph.
In such event, the Company will pay, as Additional Amounts, such amounts as may
be necessary so that every net payment made, following the effective date of
such requirements, outside the United States by the Company or any Paying Agent
of principal due in respect of this Debenture, or interest represented by any
Coupon, to the beneficial owner of which is not a United States Person (but
without any requirement that the nationality, residence or identity of such
beneficial owner be disclosed to the Company, any Paying Agent or any
governmental authority), after deduction or withholding for or on account of
such backup withholding tax or similar charge, other than a backup withholding
tax or similar charge which is (a) the result of a certification, identification
or information reporting requirement described in the first parenthetical clause
of such paragraph, (b) imposed as a result of the fact that the Company or any
Paying Agent has actual knowledge
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that the beneficial owner of this Debenture or such Coupon is within the
category of Persons described in clause (a) of the immediately preceding
paragraph, or (c) imposed as a result of presentation of this Debenture or such
Coupon for payment more than 15 days after the date on which such payment
becomes due and payable or on which payment thereof is duly provided for,
whichever occurs later, will not be less than the amount provided for in this
Debenture or such Coupon to be then due and payable.
Except as specifically provided herein and in the Indenture, the
Company shall not be required to make any payment with respect to any tax,
assessment or other governmental charge imposed by any government or any
political subdivision or taxing authority thereof or therein. Whenever in this
Debenture there is a reference, in any context, to the payment of the principal,
if any, of, premium, if any, or interest on, or in respect of, any Debenture or
any Coupon, such reference shall be deemed to include the payment of Additional
Amounts payable pursuant to the first and second preceding paragraphs to the
extent that, in such context, Additional Amounts are, were or would be payable
in respect of this Debenture pursuant to such paragraphs, and express reference
to the payment of Additional Amounts (if applicable) in any provisions of this
Debenture shall not be construed as excluding Additional Amounts in those
provisions of this Debenture where such express reference is not made.
Reference is hereby made to the further provisions of this Debenture
set forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth on the face hereof.
Unless the certificate of authentication hereon has been executed by
the Trustee referred to on the reverse hereof or its Authenticating Agent by the
manual signature of one of its authorized signatories, neither this Debenture,
nor any Coupon appertaining hereto, shall be entitled to any benefit under the
Indenture or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this Debenture to be duly
executed under its corporate seal and Coupons bearing the facsimile signature of
one of its Officers to be annexed hereto.
Dated as of _________, ____
[Corporate Seal] KFx Inc.
By: _______________________
Title:
Attest:
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_______________________
Title:
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[FORM OF REVERSE]
KFx Inc.
6% CONVERTIBLE DEBENTURES DUE 2002
This Debenture is one of a duly authorized issue of debentures of the
Company designated as its "6% Convertible Debentures due 2002" (the
"Debentures"), limited in aggregate principal amount to U.S.$25,000,000 issued
and to be issued under an Indenture, dated as of July 25, 1997 (the
"Indenture"), between the Company and First Bank National Association, doing
business as Colorado National Bank, as Trustee (the "Trustee"), to which
Indenture and all indentures supplemental thereto reference is hereby made for a
statement of the respective rights, limitations of rights, duties and immunities
thereunder of the Company, the Trustee and the Holders of the Debentures and any
Coupons appertaining thereto and of the terms upon which the Debentures are, and
are to be, authenticated and delivered.
No sinking fund is provided for the Debentures. The Debentures are
subject to redemption, at the option of the Company, as a whole or in part from
time to time, at any time after the second anniversary of the Initial Closing
Date, at a Redemption Price equal to 130% of the principal amount plus accrued
interest to the Redemption Date, and Debentures held by United States Aliens are
also redeemable as a whole, but not in part, under the circumstances described
in the next two succeeding paragraphs, at a Redemption Price equal to 100% of
the principal amount plus interest accrued to the Redemption Date; provided,
however, that interest installments on Debentures maturing on an Interest
Payment Date on or prior to such Redemption Date will be payable only upon
presentation and surrender of Coupons for such interest at an office or agency
outside the United States (except as herein provided otherwise).
If as a result of a Tax Law Change, the Company has or will become
obligated to pay to the Holder of any Debenture or Coupon Additional Amounts, as
described in the second paragraph of the face of this Debenture, and such
obligation cannot be avoided by the Company taking reasonable measures available
to it, then the Company may, at its option, redeem the Debentures as a whole,
but not in part, at a Redemption Price equal to 100% of the principal amount
plus interest accrued to the Redemption Date, but without reduction for any
applicable United States withholding taxes; provided, however, that (i) no such
notice of redemption shall be given earlier than 90 days prior to the earliest
date on which the Company would be obligated to pay any such Additional Amounts
were a payment in respect of the Debentures then due and (ii) at the time such
notice of redemption is given, such obligation to pay such Additional Amounts
remains in effect. Prior to the publication of any notice of redemption pursuant
to this paragraph, the Company shall deliver to the Trustee (a) an Officers'
Certificate stating that the Company is entitled to effect such redemption and
setting forth a statement of facts showing that the conditions precedent to the
right of the Company so to redeem have occurred and (b) an Opinion of Counsel
selected by the Company to the effect that the Company has or will become
obligated to pay such Additional Amounts as a result of such Tax Law
Change. The Company's
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right to redeem the Debentures shall continue as long as the Company is
obligated to pay such Additional Amounts, notwithstanding that the Company shall
have made payments of Additional Amounts specified in such second paragraph.
In addition, if the Company determines, based upon an Opinion of
Counsel selected by the Company, that as a result of a Tax Law Change, any
payment made outside the United States by the Company or any of its Paying
Agents of the full amount of principal, premium, if any, or interest due with
respect to any Definitive Debenture or Coupon would be subject to any
certification, identification or other information reporting requirement of any
kind, the effect of which requirement is the disclosure by the Company, any
Paying Agent or any governmental authority of the nationality, residence or
identity of a beneficial owner of such Definitive Debenture or Coupon who is a
United States Alien (other than such a requirement (a) which would not be
applicable to a payment made by the Company or any one of its Paying Agents (i)
directly to the beneficial owner or (ii) to any custodian, nominee or other
agent of the beneficial owner, (b) which can be satisfied by the custodian,
nominee or other agent certifying that such beneficial owner is not a United
States Person, provided, that, in each case referred to in clauses (a)(ii) and
(b), payment by such custodian, nominee or agent to such beneficial owner is not
otherwise subject to any such requirement, with respect to the beneficial owner
of such Definitive Debenture), the Company, at its election, will either (x)
redeem the Definitive Debentures, as a whole but not in part, upon not less than
30 nor more than 60 days' notice prior to the Redemption Date, at a Redemption
Price equal to 100% of the principal amount plus interest accrued to the
Redemption Date, or (y) if and so long as the conditions of the fourth paragraph
on the face hereof are satisfied, pay the Additional Amounts specified in such
paragraph.
The Company will make such determination and election and notify the
Trustee and the Paying Agent thereof in writing as soon as practicable, and the
Paying Agent will promptly give notice of such determination in the manner
provided in the following paragraph (the "Determination Notice"), in each case
stating the effective date of such certification, identification or information
reporting requirement, whether the Company will redeem the Debentures or will
pay the Additional Amounts specified in the third paragraph on the face hereof
and (if applicable) the last date by which the redemption of the Debenture must
take place. If the Company elects to redeem the Debentures, such redemption
shall take place on a date, not later than one year after the publication of the
Determination Notice, as the Company elects by notice in writing to the Trustee
and the Paying Agent at least 45 days before the Redemption Date, unless shorter
notice is acceptable to the Trustee. Notwithstanding the foregoing, the Company
will not so redeem the Debentures if the Company, based upon an Opinion of
Counsel selected by the Company subsequently determines, not less than 30 days
prior to the Redemption Date, that subsequent payments would not be subject to
any such requirement, in which case the Company will notify the Trustee in
writing, and the Paying Agent will promptly give notice to the Holders of the
Debentures of that determination and any earlier redemption notice will
thereupon be revoked and of no further effect. If the Company elects as provided
in clause (y) of the immediately preceding paragraph to pay Additional Amounts,
the Company may, as long as
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the Company is obligated to pay such Additional Amounts, subsequently redeem the
Debentures, at any time, as a whole but not in part, upon not less than 30 nor
more than 60 days' notice prior to the Redemption Date, at a Redemption Price
equal to 100% of the principal amount plus interest accrued to the Redemption
Date, but without reduction for applicable United States withholding taxes with
respect to which the Company is obligated to pay Additional Amounts.
Notice of redemption will be given by publication in Authorized
Newspapers in the City of London, England, and, so long as the Debentures are
listed on the Luxembourg Stock Exchange and the rules of such stock exchange
shall so require, in Luxembourg, or, if not practicable in either London,
England, or Luxembourg, elsewhere in any country in Western Europe. Notice to
the Holders will be given at least once not more than 60 nor less than 30 days
prior to the Redemption Date as provided in the Indenture.
If proper notice of redemption shall have been given, and if the
Company shall have deposited with the Trustee or with any Paying Agent (other
than the Company), for the benefit of the Holders of any of the Debentures
called for redemption in whole or in part, funds (to be immediately available
for payment) sufficient to redeem the Debentures to be redeemed on the date
fixed for redemption, at the applicable Redemption Price, together with accrued
and unpaid interest to the date fixed for redemption, then all obligations of
the Company in respect of such Debentures shall cease and be discharged (except
the obligation to issue Conversion Shares (as defined below) upon conversion of
Debentures on or prior to the applicable Redemption Date in accordance with the
terms of this Indenture and the Debentures), and the Holders of such Debentures
shall thereafter be restricted exclusively to such funds for any and all claims
of whatever nature on their part under the Indenture, or in respect of such
Debentures (except with respect to any rights of conversion as above stated).
The Debentures may be converted by Holders thereof, from time to time,
in the minimum principal amount of $10,000 and integral multiples thereof,
commencing 91 days after the Initial Closing Date and on or before the close of
business on the Maturity Date (unless previously redeemed or repurchased), on
written notice to the Company, at the Conversion Price described below (except
that, in respect of any Debenture or Debentures, or portion thereof, called for
redemption before such date or if a Holder thereof has exercised its right to
require the Company to repurchase its Debenture or portion thereof pursuant to
the Indenture, such right shall terminate at the close of business on the
applicable Redemption Date or the Repurchase Date, as the case may be, unless
the Company shall default in making payment due upon redemption or repurchase)
thereof, subject to the terms and provisions of the Indenture, into (a) a whole
number of duly authorized, validly issued, fully paid and non-assessable shares
of Common Stock (the "Conversion Shares") determined by dividing (i) the
aggregate principal amount of the Debentures to be converted by (ii) the
Conversion Price, and (b) an amount of money equal to the value of the
fractional share remainder, if any, resulting from the calculation described in
clause (a) above, to be paid in U.S. dollars based on the Conversion Price per
share.
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"Conversion Price" means, prior to the Reset Conversion Date, $3.75
per share and on and after the Reset Conversion Date, the product of multiplying
(x) the applicable Stock Price Factor, by (y) 90%, provided, however, in no
event will the Conversion Price be less than U.S.$3.65 (the "Floor"), other than
as a result of the operation of the anti-dilution provisions of the Indenture,
regardless of the actual Stock Price Factor; and provided, further, that,
notwithstanding the foregoing, if the exercise price of Warrant A is reduced,
the Floor will be reduced on a dollar-for-dollar basis.
"Stock Price Factor" means the average daily Closing Price Per Share
for the 15 Trading Days immediately preceding the Reset Conversion Date. The
Reset Conversion Date is November 1, 1999.
Debentures may be surrendered for conversion, subject to any
applicable laws and regulations, at the office of the Conversion Agent outside
the United States. Debentures surrendered for conversion must be accompanied by
a duly executed Conversion Notice and all Coupons that mature after the
Conversion Date. Fractional Shares will not be issued upon conversion; in lieu
thereof, the remainder resulting from the conversion calculation shall be paid
in cash in U.S. dollars, based on the Conversion Price per share of Common
Stock. Upon the conversion of a Debenture, the Company will pay the converting
Holder cash (in U.S. dollars) equal to any accrued and unpaid interest on the
Debentures at the time of conversion. Subject to the operation of the adjustment
provisions described below and specified in the Indenture, no payment or
adjustment shall be made for dividends, if any, on shares of Common Stock issued
upon conversion (unless the record date therefor is subsequent to the date of
conversion). In the case of Debentures called for redemption, conversion rights
will expire on the close of business on the Redemption Date.
The Conversion Price shall be subject to adjustment upon the
occurrence of certain enumerated events, including (a) the subdivision or
combination of shares, the payment of a share dividend or distribution or any
reclassification or capital reorganization of the Common Stock; or (b) the
consolidation or merger of the Company with or into any other corporation, or
sale or transfer of all or substantially all of the assets of the Company, (c)
the distribution to holders of shares of Common Stock of evidence of
Indebtedness or assets (other than regularly scheduled cash dividends); and (d)
the sale of shares of Common Stock (or Convertible Securities) at a price per
share less than the then current Conversion Price, subject to certain
exceptions. No adjustment of the Conversion Price is required to be made until
the cumulative adjustments otherwise required to be made amount to 1% of the
Conversion Price as last adjusted.
The Indenture contains covenants restricting the ability of the
Company, subject to certain exceptions and qualifications, to incur additional
indebtedness, pay dividends or make distributions in respect of its capital
stock or purchase its capital stock; create Liens; enter into transactions with
affiliates; or consolidate, merge or sell all or substantially all of its
assets.
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In case an Event of Default, as defined in the Indenture, shall have
occurred and be continuing, the principal of all of the Debentures may be
declared, and upon such declaration shall become, due and payable, in the
manner, with the effect and subject to the conditions provided in the Indenture,
by either the Trustee or the Holders of at least a 51% in aggregate principal
amount of the Outstanding Debentures.
The Holders of a majority in aggregate principal amount of Outstanding
Debentures, subject to the provisions of the Indenture relating to the duties
and rights of the Trustee, will have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or
the exercising of any trust or power conferred on the Trustee. However, the
Trustee will have the right to decline to follow any such direction, if the
Trustee determines that the action requested may not be lawfully taken, would
subject the Trustee to liability, or would be unduly prejudicial to the other
Holders. As a prerequisite to taking any such action, the Trustee may require
the Holders requesting the same to provide it with reasonable security or
indemnity against the cost, expenses and liabilities which may be incurred in
connection with such action. The Holders of at least 25% in aggregate principal
amount of Outstanding Debentures may call a meeting of Holders if the Trustee
fails to do so within 10 days after receiving a request that it call such a
meeting.
Title to the Debentures and to the Coupons appertaining thereto will
pass by delivery. The Company, any Paying Agent or Conversion Agent and the
Trustee may (to the fullest extent permitted by applicable laws) deem and treat
the Holder of any Debenture and the Holder of any Coupon as the absolute owner
thereof for all purposes (whether or not the Debenture or a Coupon shall be
overdue and, to the extent permitted by applicable law, notwithstanding any
notice of ownership or writing on the Debenture or Coupon or any notice of
previous loss or theft of the Debenture or Coupon).
With the consent of the Holders (or persons entitled to vote, or to
give consents respecting the same) of not less than a majority in aggregate
principal amount of the Outstanding Debentures, the Company, when authorized by
a Board Resolution, and the Trustee may, from time to time and at any time,
enter into a supplemental indenture for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of the Indenture
or of any supplemental indenture or of modifying in any manner the rights and
obligations of the Holders of the Debentures, Coupons and of the Company;
provided that, without the consent of the Holders of all Outstanding Debentures,
no such supplemental indenture shall, among other things, (a) extend the fixed
maturity of any Debenture, or reduce the principal amount thereof, or reduce the
rate or extend the time of payment of interest thereon, or reduce any premium
payable at maturity or upon redemption thereof, or (b) modify any of the
provisions of this Indenture with respect to conversion of the Debentures in a
manner adverse to the Holders thereof, or reduce the aforesaid percentage of
Debentures, the Holders of which are required to consent to any such
supplemental indenture.
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The Company may not enter into any amendment of this Indenture without
the prior written consent of TCK, as long as (i) TCK owns at least 1,000,000
Shares, and (ii) either of Warrant A or Warrant B remains in effect.
Except for liabilities arising under the Securities Act, no recourse
shall be had for the payment of the principal of, premium, if any, or interest
on any Debenture, or for any claim based thereon or otherwise in respect
thereof, and no recourse under or upon any obligation, covenant or agreement of
the Company in the Indenture or in any supplemental indenture, or in any
Debenture or Coupon or because of the creation of any indebtedness represented
hereby shall be had against any incorporator, stockholder, officer, trustee,
director, past, present or future, as such of the Company or of any predecessor
or successor corporation, whether by virtue of any constitution, statute or rule
of law or equity, or by the enforcement of any assessment or penalty or
otherwise; it being expressly understood that all such liability is hereby
expressly waived and released as a condition of, and as a consideration for, the
execution of the Indenture and the issue of the Debentures and Coupons.
In the event of a Change of Control, each Holder shall have the right,
during the 45-day period following receipt of notice of such occurrence, to
require the Company to repurchase all or a portion of such Holder's Debentures
at a cash purchase price equal to the principal amount plus accrued interest to
the Repurchase Date.
A "Change of Control" shall be deemed to have occurred at the time
when a person or "group" [as defined in Section 13(d)(3) of the Exchange Act, as
in effect on the date hereof] (other than the Existing Control Group) shall have
become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange
Act) of more than 50% of the aggregate Voting Stock of the Company, unless such
acquisition shall have been approved by a two-thirds (66 2/3%) majority of the
Continuing Directors of the Company.
The Indenture, each Debenture and each Coupon appertaining thereto
shall be deemed to be a contract made under the laws of the State of New York,
United States of America, and for all purposes shall be governed by and
construed in accordance with the internal substantive laws of such State,
without giving effect to the choice of law rules of such State.
No reference herein to the Indenture and no provisions of this
Debenture or of the Indenture shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of, premium,
if any, and interest on this Debenture at the time and place and at the rate and
in the manner herein prescribed.
All terms used in this Debenture which are defined in the Indenture
have the meanings assigned to them in the Indenture.
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ELECTION OF HOLDER TO REQUIRE REPURCHASE
1. Pursuant to Section XV of the Indenture, the undersigned hereby
elects to have this Debenture (or if less than the full principal amount hereof,
the principal amount set forth below) repurchased by the Company.
2. The undersigned hereby directs the Trustee or Paying Agent to pay to
bearer an amount in cash equal to 100% of the principal amount hereof plus
interest accrued to the Repurchase Date.
Dated: __________ ____________________
Signature
_________________
Signature Guaranteed
Principal amount to be repurchased:*$__________
Remaining principal amount following such repurchase:
_________
* Repurchasable in the minimum principal amount of $10,000 and integral
multiples thereof.
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(b) Form of Global Debenture
KFx INC.
6% CONVERTIBLE DEBENTURES
DUE 2002
ISIN No. XS0078387601
Common Code 7838760
KFx Inc., a corporation duly organized and existing under the laws of
the State of Delaware (the "Company"), for value received, hereby promises to
pay to bearer upon presentation and surrender of this Global Debenture the
principal sum of Seventeen Million United States dollars (U.S.$17,000,000)
(which principal amount may from time to time be increased by adjustment made in
the records of the Trustee or the Authenticating Agent in accordance with the
Indenture, but in no event shall the principal amount as so increased exceed
U.S.$25,000,000 in the aggregate at any time) on the date in the year 2002 which
is five Business Days prior to the Initial Closing Date (the "Maturity Date")
and to pay interest on such principal sum from the Initial Closing Date, or from
the most recent Interest Payment Date (as defined below) to which interest has
been paid or duly provided for, semi-annually in arrears on January 31 and July
31 in each year (an "Interest Payment Date"), commencing January 31, 1998, at
the rate of 6% per annum until the principal hereof and premium, if any, is due,
and at the rate of 8% per annum on any overdue principal and, to the extent
permitted by law, on any overdue interest; provided, however, that interest on
this Global Debenture shall be payable only after the issuance of the Definitive
Debentures for which this Global Debenture is exchangeable and, in the case of a
Definitive Debenture, only upon presentation and surrender (at any office or
agency outside the United States, except as otherwise provided in the Indenture
referred to below) of the interest Coupons attached thereto as they severally
mature.
Each Holder of this Global Debenture, by acceptance hereof, agrees
that transfers of beneficial interests may be effected only through a book entry
system maintained by such Holder (or its agent), and that ownership of a
beneficial interest in this Global Debenture shall be required to be reflected
in a book entry.
This Global Debenture is a duly authorized issue of debentures of the
Company designated as specified in the title hereof, issued and to be issued
under the Indenture, dated as of July 25, 1997 (the "Indenture"), between the
Company and First Bank National Association, doing business as Colorado National
Bank, as Trustee. This Global Debenture is a temporary security and is
exchangeable in whole, but not in part, without charge upon request of the
Holder hereof, for Definitive Debentures, with Coupons attached, of authorized
denominations, (a) not earlier than 40 days following the Final Closing Date and
(b) as promptly as practicable following presentation of certification, in one
of the forms set forth in the Indenture for such purpose, that the beneficial
owners of this Global Debenture, are not United States Persons.
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Definitive Debentures to be delivered in exchange for this Global Debenture
shall be delivered only outside the United States.
Until exchanged in full for Definitive Debentures, this Global
Debenture shall in all respects be entitled to the same benefits under, and
subject to the same terms and conditions of the Indenture as Debentures
authenticated and delivered thereunder, except that neither the Holder hereof
nor the beneficial owners of this Global Debenture shall be entitled to receive
payment of interest or other payments hereon or to convert this Global Debenture
into Common Stock of the Company or any other security, cash or other property.
The Indenture and this Global Debenture shall be deemed to be a
contract made under the laws of the State of New York, United States of America,
and for all purposes shall be governed by and construed in accordance with the
internal substantive law of such State, without giving effect to the choice of
law rules of such State.
All terms used in this Global Debenture which are defined in the
Indenture have the meanings assigned to them in the Indenture.
Unless the certificate of authentication hereon has been executed by
the Paying Agent or an Authenticating Agent by the manual signature of one of
its authorized signatories, this Global Debenture shall not be entitled to any
benefit under the Indenture or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this Global Debenture to be
duly executed under its corporate seal.
Dated as of _______________ 1997
KFx Inc.
[Corporate Seal]
By:___________
Title:
Attest:
__________
Title:
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<PAGE>
Section II.3. Form of Coupon.
--------------
[FORM OF FACE]
No. __________
ISIN No. XS0078387601
Common Code 7838760
KFx Inc. U.S.$_________
Due _________, ____
6% CONVERTIBLE DEBENTURE
DUE 2002
Unless the Debenture to which this Coupon appertains shall have been
redeemed, repurchased or converted prior to the date set forth hereon, KFx Inc.
(the "Company") shall, subject to and in accordance with the terms and
conditions of such Debenture and the Indenture referred to therein, pay to the
bearer on the date set forth hereon, upon surrender hereof, the amount shown
hereon at the paying agencies set out on the reverse hereof or at such other
places outside the United States of America (including the States and the
District of Columbia), its territories, its possessions and other areas subject
to its jurisdiction as the Company may determine from time to time.
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<PAGE>
[REVERSE OF Coupon]
LUXEMBOURG PAYING AGENT, CONVERSION AGENT
AND TRANSFER AGENT:
Banque Internationale A Luxembourg
69, route d'Esch
L-1470 Luxembourg
Section II.4. Form of Certificate of Authentication.
-------------------------------------
The Trustee's certificates of authentication shall be in substantially
the following form:*
This is one of the Debentures referred to in the within-mentioned
Indenture.
First Bank National Association,
doing business as
Colorado National Bank, as Trustee
By: [Name of Authenticating Agent],
as Authenticating Agent]
By:_________
Authorized Signatory
* For the Global Debenture and Definitive Debentures.
Section II.5. Form of Conversion Notice.
-------------------------
CONVERSION NOTICE
The undersigned Holder of this Debenture hereby irrevocably exercises
the option to convert $_____ principal amount of this Debenture into shares of
Common Stock in accordance with the terms of the Indenture referred to in this
Debenture and directs that such shares be registered in the name of and
delivered, together with a check in payment for any fractional share, to the
undersigned unless a different name has been indicated below. The address for
payment of any such check must be outside the United States. If shares are to be
registered in the name of a Person other than the undersigned, the undersigned
will pay all transfer taxes payable with respect thereto.
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Dated: _________________ ________________________
Signature
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<PAGE>
If shares are to be registered HOLDER
in the name of and delivered
to a Person other than the
Holder, please print such Please print name and
Person's name and address: address of Holder:
______________ ______________
Name Name
______________ ______________
Address Address
______________ ______________
______________ ______________
Social Security or other Social Security or other
Taxpayer Identification Taxpayer Identification
Number, if any Number, if any
Name and address (outside the
United States) to where any
check referred to in the first
paragraph of this Conversion
Notice should be mailed:
______________
Name
______________
Address
______________
Social Security or other
Taxpayer Identification
Number, if any
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<PAGE>
Section II.6. Restrictive Legends.
-------------------
Each Definitive Debenture and Global Debenture shall bear the
following legend on the face thereof:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED
PURSUANT TO REGULATION S, AN EXEMPTION FROM REGISTRATION PURSUANT TO
THE PROVISIONS UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"). THE SECURITIES EVIDENCED HEREBY HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OR THE SECURITIES LAWS OF
ANY STATE. THESE SECURITIES MAY NOT BE TRANSFERRED, OFFERED OR SOLD
PRIOR TO THE END OF THE FORTY (40)-DAY PERIOD (THE "RESTRICTED
PERIOD") COMMENCING ON THE LATER OF (i) THE DATE THE SECURITIES ARE
FIRST OFFERED TO PERSONS OTHER THAN DISTRIBUTORS (AS DEFINED IN
REGULATION S) OR (ii) THE DATE OF THE FINAL CLOSING OF THE OFFERING OF
THE DEBENTURES BY THE COMPANY, UNLESS SUCH TRANSFER, OFFER OR SALE (i)
IS MADE IN AN "OFFSHORE TRANSACTION" AND NOT TO A "U.S. PERSON" (OTHER
THAN A "DISTRIBUTOR") (AS SUCH TERMS ARE DEFINED IN REGULATION S) OR
(ii) IS MADE PURSUANT TO REGISTRATION OR AN APPLICABLE EXEMPTION UNDER
THE SECURITIES ACT. THE SECURITIES REPRESENTED BY THIS CERTIFICATE
CANNOT BE SOLD EXCEPT PURSUANT TO THE TERMS AND CONDITIONS OF THE
DEBENTURE SUBSCRIPTION AGREEMENT BETWEEN THE COMPANY AND THE INITIAL
HOLDER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE, A COPY OF
WHICH IS ON FILE AT THE OFFICES OF THE COMPANY."
"BY REQUESTING THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE AFTER THE RESTRICTED PERIOD, THE HOLDER OF THIS
CERTIFICATE REPRESENTS THAT IF SUCH TRANSFER IS MADE TO A U.S. PERSON,
THAT AT THE TIME OF SUCH TRANSFER THE HOLDER IS NOT AN "AFFILIATE" OF
THE COMPANY (AS SUCH TERM IS DEFINED IN THE SECURITIES ACT) OR AN
"UNDERWRITER" OR "DEALER" (AS SUCH TERMS ARE DEFINED IN THE ACT), HAS
NOT ENGAGED IN ANY SHORT SALES OR SIMILAR HEDGE TRANSACTIONS WITH
RESPECT TO THE COMPANY'S SHARES OF COMMON STOCK DURING THE RESTRICTED
PERIOD, IS NOT A "DISTRIBUTOR" AND SUCH TRANSFER IS NOT BEING MADE AS
PART OF A PLAN OR SCHEME TO EVADE THE REGISTRATION PROVISIONS OF THE
SECURITIES ACT."
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"ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO
LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE
LIMITATIONS PROVIDED IN SECTIONS 165(j) and 1287(a) OF THE INTERNAL
REVENUE CODE OF 1986, AS AMENDED."
ARTICLE III
THE SECURITIES
Section III.1. Title and Terms.
---------------
The Debentures shall be known and designated as the "6%
Convertible Debentures due 2002" of the Company. The aggregate principal amount
of Debentures which may be authenticated and delivered under this Indenture is
limited to U.S.$25,000,000, except for Debentures authenticated and delivered in
exchange for, or in lieu of, other Debentures pursuant to Sections 3.3, 3.4, 3.5
or 9.5. The Debentures and the Trustee's certificate of authentication will be
substantially in the form set forth in Article II hereof.
Section III.2. Denominations.
-------------
The Definitive Debentures shall be issuable in bearer form, with
interest Coupons attached, in denominations of U.S.$10,000.
Section III.3. Execution, Authentication, Delivery and Dating.
------
The Debentures shall be executed on behalf of the Company by one of
its Officers under a facsimile of its corporate seal reproduced thereon,
attested by its Secretary or one of its Assistant Secretaries. Any such
signature may be manual or facsimile and may be imprinted or otherwise
reproduced on the Debentures.
Debentures bearing the manual or facsimile signature of individuals
who were at any time the proper Officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Debentures or did not
hold such offices at the date of such Debentures.
At any time and from time to time after the execution and delivery of
this Indenture, the Company may deliver Debentures executed by the Company to
the Trustee or to its order for authentication or to the Paying Agent, together
with a Company Order for the authentication and delivery of such Debentures, and
the Trustee or an Authenticating Agent, in accordance with such Company Order,
shall authenticate and deliver such Debentures as in this Indenture provided and
not otherwise. In connection with any Company Order for
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<PAGE>
authentication, a compliance certificate and Opinion of Counsel pursuant to
Section 16.8 shall not be required.
Each Definitive Debenture and the Global Debenture shall be dated as
of the date of issuance thereof.
No Debenture (or Coupon attached thereto) shall ever be entitled to
any benefit under this Indenture or be valid or obligatory for any purpose
unless there appears on such Debenture a certificate of authentication
substantially in the form provided for in Section 2.4 executed by the Trustee or
an Authenticating Agent by manual signature of an authorized signatory, and such
certificate upon any Debenture shall be conclusive evidence, and the only
evidence, that such Debenture has been duly authenticated and delivered
hereunder. Except as permitted by Section 3.4 or 3.5, neither the Trustee nor an
Authenticating Agent shall authenticate and deliver any Definitive Debenture
unless all Coupons appurtenant thereto for interest then matured have been
detached and cancelled.
In case the Company, pursuant to Article XII, shall be consolidated or
merged with or into any other Person or shall convey, transfer, lease or
otherwise dispose of its properties and assets substantially as an entirety to
any Person, and the successor Person resulting from such consolidation, or
surviving such merger, or into which the Company shall have been merged, or the
Person which shall have received a conveyance, transfer, lease or other
disposition as aforesaid, shall have executed an indenture supplemental hereto
with the Trustee pursuant to Article XII, any of the Debentures authenticated or
delivered prior to such consolidation, merger, conveyance, transfer, lease or
other disposition may, from time to time, at the request of the successor
Person, be exchanged for other Debentures executed in the name of the successor
Person with such changes in phraseology and form as may be appropriate, but
otherwise in substance of like tenor as the Debentures surrendered for such
exchange and of like principal amount; and the Trustee or an Authenticating
Agent, upon request of the successor Person, shall authenticate and deliver
Debentures as specified in such request for the purpose of such exchange.
Section III.4. Global Securities.
-----------------
(a) The Debentures shall be issued initially in the form of one
Global Debenture, which Global Debenture shall be deposited on behalf of the
subscribers for the Debentures represented thereby with Chase Manhattan Bank
Ltd. Global Trust Services, as common depositary (the "Common Depositary"), for
credit to their respective accounts (or to such other accounts as they may
direct) at Euroclear and Cedel. The principal amount of the Global Debenture may
be increased from time to time after the Initial Closing Date by means of
appropriate adjustments made on the records of the Trustee or the Authenticating
Agent, whereupon the Trustee or the Authenticating Agent, in accordance with the
Applicable Procedures, will instruct the Common Depositary or its authorized
representative to make a
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<PAGE>
corresponding adjustment to its records, but in no event shall the principal
amount as so increased exceed U.S.$25,000,000 in the aggregate at any time.
On or before the Exchange Date, the Company shall deliver to the
Luxembourg Agent, at its principal office located at 69, rout d'Esch L-1470
Luxembourg, or its designated agent, Definitive Debentures executed by the
Company. On or after the Exchange Date, the Global Debenture shall be
surrendered by the Common Depositary to the Trustee or its agent, as the
Company's agent for such purpose, to be exchanged, for Definitive Debentures,
without charge to Holders, and the Trustee or the Paying Agent or another Paying
Agent outside the United States shall authenticate and deliver (at an office or
agency outside the United States), in exchange for the Global Debenture, an
equal aggregate principal amount of Definitive Debentures, as shall be specified
by the beneficial owners thereof; provided, however, that upon such presentation
by the Common Depositary, the Global Debenture is accompanied by a certificate
dated the Exchange Date or a subsequent date and signed by Euroclear as to the
portion of the Global Debenture held for its account then to be exchanged and a
certificate dated the Exchange Date or a subsequent date and signed by Cedel as
to the portion of the Global Debenture held for its account then to be
exchanged, each to the effect hereinafter provided. The Company hereby appoints
the principal office of the Luxembourg Agent in Luxembourg, or its designated
agent, as its agent outside the United States where Definitive Debentures may be
delivered in exchange for the Global Debenture or portions thereof. Each
beneficial owner of any portion of the Global Debenture shall be entitled to
take delivery of Definitive Debentures only at such office. Notwithstanding any
other provision hereof or of the Debentures, no Debenture initially represented
by the Global Debenture will be mailed to or otherwise delivered in connection
with its original issuance to any location within the United States. The Trustee
agrees that it will cause the Paying Agent to retain each certificate provided
by Euroclear or Cedel for a period of four calendar years following the year in
which the certificate is received and not to destroy or otherwise dispose of any
such certificate without first offering to deliver it to the Company.
The certificates to be provided by Euroclear and Cedel shall be
substantially to the following effect or with such changes therein as shall be
approved by the Company and the Placement Agents and be satisfactory to the
Trustee:
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<PAGE>
"CERTIFICATE
KFx Inc.
6% CONVERTIBLE DEBENTURES
DUE 2002
This is to certify that, based on certificates we have received from
our member organizations substantially in the form set out in Section 3.4 of the
Indenture relating to the above-captioned Debentures, as of the date hereof,
U.S.$________ principal amount of the above-captioned Debentures acquired from
KFx Inc. (the "Company") is owned by persons that are not United States Persons
(as defined below).
As used in this Certificate, "United States Person" means (1) any
natural person resident in the United States, (2) any partnership or corporation
organized or incorporated under the laws of the United States, (3) any estate of
which any executor or administrator is a United States Person, (4) any trust of
which any trustee is a United States Person, (5) any agency or branch of a
foreign entity located in the United States, (6) any non-discretionary account
or similar account (other than an estate or trust) held by a dealer or other
fiduciary organized, incorporated or (if an individual) resident in the United
States and (7) any partnership or corporation if (i) organized or incorporated
under the laws of any foreign jurisdiction and (ii) formed by a United States
Person principally for the purpose of investing in Debentures not registered
under the Securities Act, unless it is organized or incorporated, and owned, by
accredited investors (as defined in Rule 501(a) of the Securities Act) who are
not natural persons, estates or trusts; and "United States" means the United
States of America (including the States thereof and the District of Columbia),
its territories, its possessions and other areas subject to its jurisdiction.
We further certify that (i) we are not making available herewith for
exchange any portion of the Global Debenture not included in such certificates
and (ii) as of the date hereof, we have not received any notification from any
of our member organizations to the effect that the statements made by such
member organizations with respect to any portion of the part submitted herewith
for exchange are no longer true and cannot be relied upon as of the date hereof.
We understand that this certificate is required in connection with
certain securities laws of the United States. In connection therewith, if
administrative or legal proceedings are commenced or threatened in connection
with which this certificate is or would be relevant, we irrevocably authorize
you to produce this certificate to any interested party in such proceedings. We
agree to retain each statement provided by a member organization for a period of
four calendar years following the year in which the statement is received.
Dated: _______, 19__*
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<PAGE>
*To be dated no earlier
than the Exchange Date
[MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, BRUSSELS
OFFICE, AS OPERATOR OF THE
EUROCLEAR CLEARANCE SYSTEM]
[CEDEL BANK SOCIETE ANONYME]
By:_________________
Each certificate received by Euroclear and Cedel from Persons
appearing in their records as Persons entitled to a portion of the Global
Debenture shall be substantially to the effect set forth in Section 3.4(b).
Until exchanged in full, the Global Debenture shall in all respects be
entitled to the same benefits under, and subject to the same terms and
conditions of, this Indenture as Definitive Debentures authenticated and
delivered hereunder, except that none of Euroclear, Cedel or the beneficial
owners of the Global Debenture shall be entitled to receive payment of interest
or other payments thereon or to convert the Global Debenture or any portion
thereof, into Conversion Shares or any other security, cash or other property.
(b) Whenever any provision of this Indenture or the form of Global
Debenture contemplates that certification be given by a beneficial owner of a
portion of the Global Debenture, such certification shall be provided
substantially in the form of the following certificate, with only such changes
as shall be approved by the Company:
"CERTIFICATE
KFx Inc.
6% CONVERTIBLE SUBORDINATED DEBENTURES
DUE 2002
This is to certify that as of the date hereof and except as provided
in the fourth paragraph hereof, the above-captioned Debentures held by you for
our account are owned by a person that is not a United States Person (as defined
below).
As used in this Certificate, "United States Person" means (1) any
natural person resident in the United States, (2) any partnership or corporation
organized or incorporated under the laws of the United States, (3) any estate of
which any executor or administrator is a United
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<PAGE>
States Person, (4) any trust of which any trustee is a United States Person, (5)
any agency or branch of a foreign entity located in the United States, (6) any
non-discretionary account or similar account (other than an estate or trust)
held by a dealer or other fiduciary organized, incorporated or (if an
individual) resident in the United States and (7) any partnership or corporation
if (i) organized or incorporated under the laws of any foreign jurisdiction and
(ii) formed by a United States Person principally for the purpose of investing
in Debentures not registered under the Securities Act, unless it is organized or
incorporated, and owned, by accredited investors (as defined in Rule 501(a) of
the Securities Act) who are not natural persons, estates or trusts; and "United
States" means the United States of America (including the States thereof and the
District of Columbia), its territories, its possessions and other areas subject
to its jurisdiction.
We undertake to advise you by telecopy, on or before the date on which
you intend to submit your certification relating to the above-captioned
Debentures then appearing in your books as being held for our account, if the
above statement as to beneficial ownership is not correct on such date as to all
such Debentures.
This certificate excepts and does not relate to U.S. $________
principal amount of the above-captioned Debentures appearing on your books as
being held for our account as to which we are not yet able to certify and as to
which we understand that exchange and delivery of Definitive Debentures cannot
be made until we are able so to certify.
We understand that this certificate is required in connection with
certain securities laws of the United States. If administrative or legal
proceedings are commenced or threatened
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<PAGE>
in connection with which this certificate is or would be relevant, we
irrevocably authorize you to produce this certificate or a copy hereof to any
interested party in such proceedings.
Dated:__________, 19___*
*To be dated on or after
the 15th day before the
Exchange Date
[Name of Account Holder]
___________________________
(Authorized Signatory)
Name:
Title:
(c) Members of, or participants in, Euroclear and Cedel shall have no
rights under this Indenture with respect to any Global Debenture held on their
behalf by the Common Depositary, or under the Global Debenture, and the Common
Depositary may be treated by the Company, the Trustee and any agent of the
Company or the Trustee as the absolute owner of the foregoing. Notwithstanding
the foregoing, nothing herein shall prevent the Company, the Trustee or any
agent of the Company or the Trustee, from giving effect to any written
certification, proxy or other authorization furnished by the Common Depositary
or shall impair, as between the Common Depositary and members of, or
participants in, Euroclear and Cedel, the operation of customary practices
governing the exercise of the rights of a Holder of a Debenture.
(d) Transfers of the Global Debenture shall be limited to transfers
of such Global Debenture in whole, but not in part, to the Common Depositary,
its successors or their respective nominees. Interests of beneficial owners in
the Global Debenture may be transferred in accordance with the Applicable
Procedures of the Common Depositary and the provisions of this Section 3.4.
Section III.5. Mutilated, Destroyed, Lost and Stolen Debentures and
--------------
Coupons.
- -------
If any mutilated Debenture or a Debenture with a mutilated Coupon
appertaining to it is surrendered to the Trustee or a Transfer Agent outside the
United States, the Company shall execute, the Trustee or an Authenticating Agent
shall authenticate and the Trustee or Transfer Agent shall deliver in exchange
therefor, a new Debenture of like tenor and principal amount and bearing a
number not contemporaneously outstanding, with Coupons corresponding to the
Coupons, if any, appertaining to the surrendered Debenture; provided, however,
that any Definitive Debenture or any Coupon shall be delivered only outside the
United States and, so
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long as the Debentures are listed on the Luxembourg Stock Exchange and the rules
of such Exchange so require, such delivery shall occur at the Transfer Agent in
Luxembourg; and provided, further, that all Definitive Debentures shall be
delivered and received in person.
If the following are delivered to the Company and the Trustee or a
Transfer Agent outside the United States:
(1) evidence to their satisfaction of the destruction, loss or theft
of any Debenture or Coupon, and
(2) such security or indemnity as may be satisfactory to the Company
and the Trustee and such Transfer Agent to save each of them and any agent
of either of them harmless,
then, in the absence of actual notice to the Company, the Trustee or the
Transfer Agent that such Debenture or Coupon has been acquired by a bona fide
purchaser, the Company shall execute, the Trustee or an Authenticating Agent
shall authenticate and the Trustee or Transfer Agent shall deliver, in lieu of
any such destroyed, lost or stolen Debenture or in exchange for the Debenture to
which such Coupon appertains (together with all appurtenant Coupons not
destroyed, lost or stolen), a new Debenture of like tenor and principal amount
and bearing a number not contemporaneously outstanding, with Coupons
corresponding to the Coupons, if any, appertaining to the Debenture to which
such destroyed, lost or stolen Debenture or appertaining to the Debenture to
which such destroyed, lost or stolen Coupon appertains; provided, however, that
any Definitive Debenture or any Coupon shall be delivered only outside the
United States and, so long as the Debentures are listed on the Luxembourg Stock
Exchange and the rules of the Luxembourg Stock Exchange so require, such
delivery shall occur at the Transfer Agent in Luxembourg; and provided, further,
that all Definitive Debentures shall be delivered and received in person.
In case any such mutilated, destroyed, lost or stolen Debenture or
Coupon has become or is about to become due and payable, the Company in its
discretion, but subject to any conversion rights, may, instead of issuing a new
Debenture, pay such Debenture or Coupon, upon satisfaction of the conditions set
forth in the preceding paragraph; provided, however, that except as otherwise
provided in the form of Definitive Debentures set forth in Section 2.2(a), the
principal of and interest on Definitive Debentures shall be payable only at an
office or agency outside the United States and, in the case of interest, only
upon presentation and surrender of the Coupons appertaining thereto.
Upon the issuance of any new Debenture under this Section 3.5, the
Company may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee, the Paying Agent and
the Transfer Agent) connected therewith.
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Every new Debenture with its Coupons, if any, issued pursuant to this
Section 3.5 in lieu of any destroyed, lost or stolen Debenture or in exchange
for a Debenture to which a destroyed, lost or stolen Coupon appertains, shall
constitute an original additional Contractual Obligation of the Company, whether
or not the destroyed, lost or stolen Debenture and its Coupons, if any, or the
destroyed, lost or stolen Coupon shall be at any time enforceable by anyone, and
such new Debenture and Coupons, if any, shall be entitled to all the benefits of
this Indenture equally and proportionately with any and all other Debentures and
Coupons duly issued hereunder.
The provisions of this Section 3.5 are exclusive and shall preclude
(to the extent lawful) all other rights and remedies with respect to the
replacement or payment of mutilated, destroyed, lost or stolen Debentures or
Coupons.
Section III.6. Persons Deemed Owners.
---------------------
The Company, the Trustee, the Paying Agent and any agent of the
Company or the Trustee may treat the Person who is the bearer of any Debenture
or Coupon as the owner of such Debenture or Coupon for the purpose of receiving
payment of principal of, premium, if any, and interest on such Debenture and for
all other purposes whatsoever, whether or not such Debenture be overdue, and
none of the Company, the Trustee, the Paying Agent or any agent of the Company
or the Trustee shall be affected by notice to the contrary.
Section III.7. Cancellation.
------------
All Debentures surrendered for payment, redemption, repurchase,
exchange or conversion shall, if surrendered to any Person other than the
Trustee, be delivered to the Trustee. All Definitive Debentures and Coupons so
surrendered shall be immediately cancelled by such Person upon receipt prior to
being forwarded to the Trustee. No Debentures shall be authenticated in lieu of
or in exchange for any Debentures cancelled as provided in this Section 3.7,
except as expressly permitted by this Indenture. The cancelled Global Debenture
and certificates referred to in Section 3.4 shall be delivered to the Company.
All cancelled Debentures, Coupons and certificates in connection therewith held
by the Trustee shall be delivered to the Company.
Section III.8. Computation of Interest.
-----------------------
Interest on the Debentures shall be computed on the basis of a 360-day
year of twelve 30-day months.
Section III.9. ISIN, Common Code Or Other Identifying Numbers.
-------
The Company in issuing the Debentures may use "ISIN," "Common Code" or
other identifying numbers (if then generally in use), and the Trustee shall use
ISIN, CUSIP or
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other identifying numbers in notices of redemption and other notices provided
for the benefit of the Holders of Debentures, as a convenience to Holders;
provided that any such notice shall state that no representation is made as to
the correctness of such numbers either as printed on the Debentures or as
contained in any notice of redemption or other notice.
ARTICLE IV
REDEMPTION OF SECURITIES
Section IV.1. Right of Redemption.
-------------------
The Debentures may be redeemed in accordance with the provisions of
the form of Definitive Debenture set forth in Section 2.2.
Section IV.2. Applicability of Article.
------------------------
Redemption of Debentures at the election of the Company, as permitted
by any provision of the Debentures or this Indenture, shall be made in
accordance with such provision and this Article IV.
Section IV.3. Election to Redeem; Notice to Trustee.
-------------------------------------
The election of the Company to redeem any Debentures shall be
evidenced by a Board Resolution. In case of any redemption at the election of
the Company of any of the Debentures, the Company shall at least 30 days (or at
least 45 days in case of a redemption pursuant to the fourth paragraph of the
reverse of the form of Definitive Debentures set forth in Section 2.2(a)) prior
to the Redemption Date fixed by the Company (unless a shorter notice shall be
satisfactory to the Trustee), notify the Trustee in writing of such Redemption
Date and of the principal amount of Debentures to be redeemed. If the Debentures
are to be redeemed pursuant to an election of the Company which is subject to a
condition specified in the form of Definitive Debenture set forth in Section
2.2(a), the Company shall furnish the Trustee with an Officers' Certificate
stating that the Company is entitled to effect such redemption and setting forth
a statement of facts showing that the conditions precedent to the right of the
Company so to redeem have occurred.
Section IV.4. Notice of Redemption; Section of Debentures.
----------
Notice of redemption shall be given to the Holders of Debentures to be
redeemed at least 30 days, nor more than 60 days, prior to the Redemption Date,
and (except, in the case of a redemption pursuant to the fourth paragraph of the
forms of the reverse of the Definitive Debenture set forth in Section 2.2(a), to
the extent otherwise expressly provided in such form) such notice shall be
irrevocable.
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All notices of redemption shall state: (a) the Redemption Date; (b)
the Redemption Price; (c) that, on the Redemption Date, the Redemption Price,
and accrued interest, if any, will become due and payable upon each such
Debenture to be redeemed (but only with respect to Debentures with all unmatured
Coupons attached), and that interest thereon shall cease to accrue on and after
such date; (d) the Conversion Price, the date on which the right to convert the
Debentures to be redeemed will terminate and the places where such Debentures,
together with all unmatured Coupons and any matured Coupons in default
appertaining thereto, may be surrendered for conversion; and (e) the place or
places where such Debentures, together with all Coupons appertaining thereto, if
any, maturing after the Redemption Date, are to be surrendered for payment of
the Redemption Price and accrued interest, if any; and (f) the serial and ISIN
(if any) numbers of the Debentures to be redeemed and in case of a partial
redemption, the principal amounts of the particular Debentures to be redeemed.
Notice of redemption of Debentures to be redeemed at the election of
the Company shall be given by the Company or, at the Company's request, by the
Trustee in the name of and at the expense of the Company.
If less than all of the Debentures are to be redeemed, the Company, in
its sole discretion, shall select the particular Debentures or parts thereof so
to be redeemed according to such method as the Company deems fair and
appropriate.
Section IV.5. Deposit of Redemption Price.
---------------------------
One Business Day prior to any Redemption Date, the Company shall
deposit with the Trustee or with the Paying Agent (or, if the Company is acting
as its own Paying Agent, segregate and hold in trust as provided in Section 6.3)
an amount of money (which shall be in immediately available funds on such
Redemption Date) sufficient to pay the Redemption Price of, and (except if the
Redemption Date shall be an Interest Payment Date) accrued interest on, all the
Debentures which are to be redeemed on that date, other than any Debentures
called for redemption on that date which have been converted prior to the date
of such deposit.
If any Debenture called for redemption is converted, any money
deposited with the Trustee or with a Paying Agent or so segregated and held in
trust for the redemption of such Security shall be paid to the Company or, if
then held by the Company, shall be discharged from such trust, upon delivery to
the Trustee of such converted Debentures for cancellation.
Section IV.6. Debentures Payable on Redemption Date.
-------------------------------------
Notice of redemption having been given as aforesaid, the Debentures so
to be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified and from and after such date (unless the
Company shall default in the payment of the Redemption Price, including accrued
interest) such Debentures shall cease to bear interest
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and the Coupons shall, except to the extent provided below, be void. Upon
surrender of any Debenture for redemption in accordance with such notice,
together with all Coupons, if any, appertaining thereto maturing after the
Redemption Date, such Debenture shall be paid by the Company at the Redemption
Price, together with accrued and unpaid interest to the Redemption Date;
provided, however, that installments of interest on Definitive Debentures on or
prior to the Redemption Date shall be payable only upon presentation and
surrender of Coupons for such interest (at an office or agency outside the
United States, except as otherwise provided in the form of Definitive Debenture
set forth in Section 2.2(a)).
If any Debenture called for redemption shall not be paid upon
surrender thereof for redemption, the principal amount of such Debenture shall,
until paid, bear interest from the Redemption Date at a rate of 8% per annum and
each Debenture shall remain convertible into Common Stock until the principal of
such Debenture or portion thereof, as the case may be, shall have been paid or
duly provided for.
If any Definitive Debenture surrendered for redemption shall not be
accompanied by all appurtenant Coupons maturing after the Redemption Date, such
Debenture may be paid after deducting from the Redemption Price an amount equal
to the face amount of all such missing Coupons or the surrender of such missing
Coupons may be waived by the Company and the Trustee or the Paying Agent or its
agent, if there be furnished to them such security or indemnity as they may
require to save each of them and any Paying Agent harmless. If thereafter the
Holder of such Debenture shall surrender to any Paying Agent any such missing
Coupon in respect of which a deduction shall have been made from the Redemption
Price, such Holder shall be entitled to receive the amount so deducted;
provided, however, that interest represented by Coupons shall be payable only
upon presentation and surrender of those Coupons at an office or agency located
outside of the United States (except as otherwise provided in the form of
Definitive Debenture set forth in Section 2.2(a)).
ARTICLE V
CONVERSION OF DEBENTURES
Section V.1. Conversion Privilege.
--------------------
Subject to and in compliance with the provisions of the form of
Definitive Debenture set forth in Section 2.2(a) and this Article V, at the
option of the Holder thereof, any Definitive Debenture may be converted into
Conversion Shares at the Conversion Price at the time in effect.
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Section V.2. Exercise of Conversion Privilege.
--------------------------------
(a) In order to exercise the conversion privilege, the Holder of any
Definitive Debenture to be converted shall surrender such Debenture, together
with all Coupons that mature after the Conversion Date, at any office or agency
of the Company maintained for that purpose pursuant to Section 6.2, accompanied
by a duly signed conversion notice substantially in the form set forth in
Section 2.5 ("Conversion Notice") stating that the Holder elects to convert such
Debenture or, if less than the entire principal amount thereof is to be
converted, subject to Section 5.2(c), the portion thereof to be converted. If
the Debenture surrendered for conversion shall not be accompanied by all such
Coupons, the surrender of any or all of such missing Coupons may be waived by
the Company by Company Order, if there shall be furnished to the Company and the
Trustee such security or indemnity as they may require to save each of them and
any Paying Agent harmless. Matured Coupons not in default (including Coupons
maturing on the Conversion Date) will be payable against surrender thereof, and
matured Coupons previously surrendered and in default will continue to be
payable, notwithstanding exercise of the conversion privilege by the Holder of
such Debenture. Accrued and unpaid interest on the Debentures surrendered for
conversion through the Conversion Date will be paid in cash as of the Conversion
Date. Except as provided in this paragraph, no cash payment or adjustment shall
be made upon any conversion, in respect of any Debenture (or, subject to Section
5.2(c), part thereof, as the case may be) surrendered for conversion, or on
account of any dividends on the Common Stock issued upon conversion. The
Company's delivery to the Holder of the fixed number of shares of Common Stock
(or a cash adjustment, as provided in this Indenture) into which a Debenture is
convertible will be deemed to satisfy the Company's obligation to pay the
principal amount of the Debenture.
(b) Debentures shall be deemed to have been converted immediately
prior to the close of business on the date of surrender of such Debentures for
conversion in accordance with the foregoing provisions ("Conversion Date") and
at such time the rights of the Holders of such Debentures as Holders shall
cease, and the Person or Persons entitled to receive the Conversion Shares shall
be treated for all purposes as the record holder or holders of such Conversion
Shares at such time. As promptly as practicable on or after the Conversion Date,
the Company shall issue and deliver to the Trustee, for delivery to the Holder,
a certificate or certificates for the number of full Conversion Shares, together
with payment in lieu of any fraction of a share, as provided in this Section
5.2.
(c) In the case of any Debenture which is converted in part only, upon
such conversion the Company shall execute and the Trustee shall authenticate and
deliver to the Holder thereof, at the expense of the Company, a new Debenture or
Debentures of authorized denomination in an aggregate principal amount equal to
the unconverted portion of the principal amount of such Debenture. A Debenture
may be converted in part, but only if it is of a denomination of U.S.$10,000 and
the principal amount of such Debenture both to be converted and to remain
Outstanding after such conversion is to be equal to U.S.$10,000 or any integral
multiple of U.S.$10,000 in excess thereof.
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Section V.3. Fractions of Shares.
-------------------
No fractional Conversion Shares of Common Stock shall be issued upon
conversion of any Debenture. Instead of any fractional Conversion Share which
would otherwise be issuable upon conversion of any Debenture, the Company shall
calculate and pay a cash adjustment in respect of such fraction (calculated to
the nearest 1/100th of a share) in an amount equal to the same fraction of the
Conversion Price per share of Common Stock at the close of business on the
Conversion Date. Such cash payments shall be made to an address outside of the
United States. If more than one Debenture shall be surrendered for conversion
at one time by the same Holder, the number of full shares which shall be
issuable upon conversion thereof shall be computed on the basis of the aggregate
principal amount of the Debentures so surrendered for conversion.
Section V.4. Adjustment of Conversion Price.
------------------------------
(a) In case the Company shall pay or make a dividend or other
distribution to all holders of any class of its capital stock in shares of
Common Stock, the Conversion Price in effect at the opening of business on the
day next following the date fixed for the determination of stockholders entitled
to receive such dividend or other distribution shall be reduced by multiplying
such Conversion Price by a fraction, of which the numerator shall be the number
of shares of Common Stock outstanding at the close of business on the date fixed
for such determination, and the denominator shall be the sum of the numerator
and the total number of shares constituting such dividend or other distribution,
such reduction to become effective immediately after the opening of business on
the day next following the date fixed for such determination. For the purposes
of this Section 5.4(a), the number of shares of Common Stock at any time
outstanding shall not include shares held in the treasury of the Company. The
Company will not pay any dividend or make any distribution on shares of Common
Stock held in the treasury of the Company.
(b) In case the Company shall, by dividend or otherwise, distribute to
all holders of its Common Stock evidences of its indebtedness or assets
(including stock or other securities of the Company or any other issuer, but
excluding any dividend or distribution paid exclusively in cash, any dividend or
distribution referred to in Section 5.4(a)), the Conversion Price shall be
reduced so that the same shall equal the price determined by multiplying the
Conversion Price in effect immediately prior to the effectiveness of the
Conversion Price reduction contemplated by this Section 5.4 by a fraction, of
which the numerator shall be the current market price per share (determined as
provided in Section 5.4(e)) of the Common Stock on the date of such
effectiveness less the then fair market value (each reference to "fair market
value" in this Section 5.4 shall mean fair market value as determined in good
faith by the Board of Directors, whose determination shall be conclusive and
described in a Board Resolution filed with the Trustee), of the portion of the
evidences of indebtedness or assets so distributed applicable to one share of
Common Stock, and the denominator shall be such current market
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price per share of the Common Stock. Such reduction shall become effective
immediately prior to the opening of business on the day next following the date
fixed for the payment of such distribution.
(c) In case outstanding shares of Common Stock shall be subdivided
into a greater number of shares of Common Stock, the Conversion Price in effect
at the opening of business on the day following the day upon which such
subdivision becomes effective shall be proportionately reduced, and, conversely,
in case outstanding shares of Common Stock shall each be combined into a smaller
number of shares of Common Stock, the Conversion Price in effect at the opening
of business on the day following the day upon which such combination becomes
effective shall be proportionately increased, such reduction or increase, as the
case may be, to become effective immediately after the opening of business on
the day following the day upon which such subdivision or combination becomes
effective.
(d) If the Company shall issue or sell any shares of Common Stock for
a consideration per share less than the Conversion Price in effect immediately
prior to the time of such issue or sale or for no consideration (excluding any
event set forth in Section 5.4 (a) or (b)), then, forthwith upon such issue or
sale, the Conversion Price shall be reduced to the consideration per share
received by the Company for the shares of Common Stock issued or sold; provided,
however, that the Conversion Price shall not be reduced by reason of the
exercise of any options or warrants to purchase Common Stock which (a) are
outstanding on the date hereof, (b) are acquired pursuant to the exercise of
options which are granted in the future pursuant to a stock option plan which
has been or may be adopted by the Company, or (c) are acquired pursuant to the
exercise of options or warrants granted pursuant to consulting agreements with
the Company or one of its Subsidiaries, provided that such options or warrants
may not represent the right to acquire more than one million shares of Common
Stock in the aggregate and shall have an exercise price equal to not less than
100% of the fair market value of a share of Common Stock on the date of grant.
In no event shall the Exercise Price be adjusted so that the Exercise Price per
share is less than the par value per share of the Common Stock.
For purposes of this Section 5.4(d), the following shall be
applicable:
(1) If the Company shall in any manner grant (whether directly or by
assumption in a merger or otherwise) any rights to subscribe for or to purchase,
or any options for the purchase of Common Shares or any stock or securities
convertible into or exchangeable for shares of Common Stock (such convertible or
exchangeable stock or securities being herein called "Convertible Securities"),
whether or not such rights or options or the right to convert or exchange any
such Convertible Securities are immediately exercisable, and the price per share
for which shares of Common Stock are issuable upon the exercise of such rights
or options or upon conversion or exchange of such Convertible Securities
(determined by dividing (i) the total amount, if any, received or receivable by
the Company as consideration for the granting of such rights or options, plus
the minimum aggregate amount of additional consideration, if any, payable to the
Company upon the exercise of such rights or options, or plus, in the case of
such
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rights or options which relate to Convertible Securities, the minimum
aggregate amount of additional consideration, if any, payable upon the issue or
sale of such Convertible Securities and upon the conversion or exchange thereof,
by (ii) the total maximum number of Common Shares issuable upon the exercise of
such rights or options or upon the conversion or exchange of all such
Convertible Securities issuable upon the exercise of such rights or options)
shall be less than the Conversion Price in effect immediately prior to the time
of the granting of such rights or options, as the case may be, then the total
maximum number of shares of Common Stock issuable upon the exercise of such
rights or options or upon conversion or exchange of all such Convertible
Securities issuable upon the exercise of such rights or options shall be deemed
to be issued as of the date of the issuance of such rights or options and the
reduction set forth in Section 5.4(d) shall be effected as of such date. Except
as provided in subparagraph
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(3), no further adjustment of the Conversion Price shall be made upon the actual
issue of such shares of Common Stock or of such Convertible Securities upon
exercise of such rights or options or upon the actual issue of such shares of
Common Stock upon conversion or exchange of such Convertible Securities.
(2) If the Company shall in any manner issue (whether directly or by
assumption in a merger or otherwise) or sell any Convertible Securities, whether
or not the right to exchange or convert thereunder is immediately exercisable,
and the price per share for which shares of Common Stock are issuable upon such
conversion or exchange (determined by dividing (i) the total amount, if any,
received or receivable by the Company as consideration for the issue or sale of
such Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or exchange
thereof, by (ii) the total maximum number of shares of Common Stock issuable
upon the conversion or exchange of all such Convertible Securities) shall be
less than the Conversion Price in effect immediately prior to the time of such
issue or sale, then the total maximum number of shares of Common Stock issuable
upon conversion or exchange of all such Convertible Securities shall be deemed
to be issued as of the date of the issuance of such Convertible Securities and
the reduction set forth in Section 5.4(d) shall be effected as of such date;
provided, however, that (a) except as otherwise provided in subparagraph (3), no
further adjustment of the Conversion Price shall be made upon the actual issue
of such shares of Common Stock upon conversion or exchange of such Convertible
Securities, and (b) if any such issue or sale of such Convertible Securities is
made upon exercise of any rights to subscribe for or to purchase or any option
to purchase any such Convertible Securities for which adjustments of the
Conversion Price have been or are to be made pursuant to the provisions of
subparagraph (1), no further adjustment of the Conversion Price shall be made by
reason of such issue or sale.
(3) Upon the happening of any of the following events, namely, if the
purchase price provided for in any right or option referred to in subparagraph
(1), or the additional consideration, if any, payable upon the conversion or
exchange of any Convertible Securities referred to in subparagraphs (1) or (2),
or the rate at which any Convertible Securities referred to in subparagraph (1)
or (2) are convertible into or exchangeable for shares of Common Stock, shall
change (other than under or by reason of provisions designed to protect against
dilution), the Conversion Price then in effect hereunder shall forthwith be
readjusted (increased or decreased, as the case may be) to the Conversion Price
which would have been in effect at such time had such rights, options or
Convertible Securities still outstanding provided for such changed purchase
price, additional consideration or conversion rate, as the case may be, at the
time they had initially been granted, issued or sold. On the expiration of any
such option or right referred to in subparagraph (1), or the termination of any
such right to convert or exchange any such Convertible Securities referred to in
subparagraphs (1) or (2), the Conversion Price then in effect hereunder shall
forthwith be readjusted (increased or decreased, as the case may be) to the
Conversion Price which would have been in effect at the time of such expiration
or termination had such right, option or Convertible Securities, to the extent
outstanding immediately prior to such expiration or termination, never been
granted, issued or sold, and the shares of Common
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Stock issuable thereunder shall no longer be deemed to be outstanding. If the
purchase price provided for in any such right or option referred to in
subparagraph (1), or the rate at which any Convertible Securities referred to in
subparagraphs (1) or (2) are convertible into or exchangeable for shares of
Common Stock, shall be reduced at any time under or by reason of provisions with
respect thereto designed to protect against dilution, then in case of the
delivery of shares of Common Stock upon the exercise of any such right or option
or upon conversion or exchange of any such Convertible Securities, the
Conversion Price then in effect hereunder shall, if not already adjusted,
forthwith be adjusted to such amount as would have been obtained had such right,
option or Convertible Securities never been issued as to such shares of Common
Stock and had adjustments been made upon the issuance of such shares of Common
Stock delivered as aforesaid, but only if as a result of such adjustment the
Conversion Price then in effect hereunder is thereby reduced.
Notwithstanding the foregoing, if an adjustment has been made to the
Conversion Price as a result of the issuance of any class of rights, options or
Convertible Securities, and a portion of such class has been exercised,
converted or exchanged, then no increase in the Conversion Price shall be made
by reason of a subsequent change in the purchase price, or conversion rate, as
the case may be, or the expiration, of any such rights, options or Convertible
Securities remaining outstanding.
(4) In case at any time shares of Common Stock or Convertible
Securities or any rights or options to purchase any such shares of Common Stock
or Convertible Securities shall be issued or sold for cash, the consideration
therefor. In case at any time any shares of Common Stock, Convertible Securities
or any rights or options to purchase any such shares of Common Stock or
Convertible Securities shall be issued or sold for consideration other than
cash, the amount of the consideration other than cash received by the Company
shall be deemed to be the fair value of such consideration, as determined
reasonably and in good faith by the Board of Directors. In case at any time any
shares of Common Stock, Convertible Securities or any rights or options to
purchase any shares of Common Stock or Convertible Securities shall be issued in
connection with any merger or consolidation in which the Company is the
surviving corporation, the amount of consideration received therefor shall be
deemed to be the fair market value, of such portion of the assets and business
of the nonsurviving corporation as the Board of Directors may determine to be
attributable to such shares of Common Stock, Convertible Securities, rights or
options, as the case may be. In case at any time any rights or options to
purchase any shares of Common Stock or Convertible Securities shall be issued in
connection with the issue and sale of other securities of the Company, together
comprising one integral transaction in which no consideration is allocated to
such rights or options by the parties thereto, such rights or options shall be
deemed to have been issued without consideration; and if a specific amount of
consideration is allocated to such rights or options, such rights or options
shall be deemed to have been issued for such consideration. In the event of any
consolidation or merger of the Company in which stock or securities of another
corporation are issued in exchange for Common Stock of the Company or in the
event of any sale of all or substantially all of the assets of the Company in
exchange for stock or other securities of another corporation, the Company shall
be
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deemed to have issued a number of shares of its Common Stock for stock or
securities of the other corporation computed on the basis of the actual exchange
ratio on which the transaction was predicated and for a consideration equal to
the fair market value on the date of such transaction of such stock or
securities of the other corporation, as determined in good faith by the Board of
Directors, and if any such calculation results in adjustment of the Conversion
Price, the determination of the number of Conversion Shares receivable upon
conversion of this Debenture immediately prior to such merger, consolidation or
sale, for purposes of Section 5.4, shall be made after giving effect to such
adjustment of the Conversion Price.
(5) In case the Company shall take a record of the holders of its
shares of Common Stock for the purpose of entitling them (i) to receive a
dividend or other distribution payable in shares of Common Stock or Convertible
Securities, or (ii) to subscribe for or purchase shares of Common Stock or
Convertible Securities, then such record date shall be deemed to be the date of
the issue or sale of the shares of Common Stock or Convertible Securities deemed
to have been issued or sold as a result of the declaration of such dividend or
the making of such other distribution or the date of the granting of such right
of subscription or purchase, as the case may be.
(e) For the purpose of any computation under Section 5.4(b), the
"current market price per share" of Common Stock on any date shall be calculated
by the Company and be deemed to be the average of the daily Closing Price Per
Share for each of the five consecutive Trading Days selected by the Company
commencing not more than 10 Trading Days before, and ending not later than, the
earlier of the day in question and the day before the "ex date" with respect to
the issuance or distribution requiring such computation. For purposes of this
paragraph, the term "ex date", when used with respect to any issuance or
distribution, means the first date on which the Common Stock trades in a regular
way on the applicable securities exchange or in the applicable securities market
without the right to receive such issuance or distribution.
(f) No adjustment in the Conversion Price shall be required unless
such adjustment would require an increase or decrease of at least one percent
(1%) in the Conversion Price; provided, however, that any adjustments which by
reason of this paragraph (f) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment.
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Section V.5. Notice of Adjustments of Conversion Price.
-----
Whenever the Conversion Price is adjusted as herein provided, the
Company shall compute the adjusted Conversion Price in accordance with Section
5.4 and shall prepare a certificate signed by the chief financial officer of the
Company setting forth the adjusted Conversion Price and showing in reasonable
detail the facts upon which such adjustment is based, and such certificate shall
promptly be delivered to the Trustee and the Conversion Agent, and the Company
shall cause notice thereof to be published in accordance with Section 16.5
within 10 Business Days after the effective date of such adjustment.
Section V.6. Notice of Certain Corporate Action.
----------------------------------
In the event:
(a) the Company shall declare a dividend (or any other distribution)
on its Common Stock payable otherwise than exclusively in cash; or
(b) the Company shall authorize the granting to the holders of its
Common Stock of rights, warrants or options to subscribe for or purchase any
shares of capital stock of any class or of any other rights; or
(c) of (1) any reclassification of the Common Stock of the Company,
(2) any consolidation or merger to which the Company is a party and for which
approval of any stockholders of the Company is required, or (3) the sale or
other disposition of all or substantially all of the assets of the Company; or
(d) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company; o r
(e) the Company or any Subsidiary of the Company shall commence a
tender or exchange offer for all or a portion of the Company's outstanding
shares of Common Stock (or shall amend any such tender or exchange offer);
then, the Company shall cause to be mailed to the Conversion Agent and to be
published in the manner provided under Section 16.5 hereof within 10 Business
Days after the date on which notice is sent to the holders of the Company's
Common Stock, a notice stating (i) the date on which a record is to be taken for
the purpose of such dividend, distribution or granting of rights, warrants or
options, or, if a record is not to be taken, the date as of which the holders of
Common Stock of record to be entitled to such dividend, distribution, rights,
warrants or options are to be determined, or (ii) the date on which such
reclassification, consolidation, merger, sale or other disposition, dissolution,
liquidation or winding up is expected to become effective, and the date as of
which it is expected that holders of Common Stock of record shall be entitled to
exchange their shares of Common Stock for securities, cash or other property
deliverable upon such
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reclassification, consolidation, merger, sale or other disposition, dissolution,
liquidation or winding up, or (iii) the date on which such tender offer
commenced, the date on which such tender offer is scheduled to expire unless
extended, the consideration offered and the other material terms thereof (or the
material terms of any amendment thereto).
Section V.7. Company to Reserve Common Stock. The Company shall at all
-------------------------------
times reserve and keep available, free from preemptive rights, out of its
authorized and unissued Common Stock, solely for the purpose of effecting the
conversion of Debentures, the full number of shares then issuable upon the
conversion in full of all Outstanding Debentures.
Section V.8. Taxes on Conversions.
--------------------
The Company will pay any and all taxes that may be payable in respect
of the issue or delivery of Conversion Shares pursuant hereto. The Company shall
not, however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of Conversion Shares in a name other
than that of the Holder of the Debentures to be converted, and no such issue or
delivery shall be made unless and until the Person requesting such issue has
paid to the Company the amount of any such tax, or has established to the
satisfaction of the Company that such tax has been paid.
Section V.9. Cancellation of Converted Definitive Debentures.
----------
All Definitive Debentures delivered for conversion to the Conversion
Agent shall be cancelled by the Company, and shall not under any circumstances
be reissued.
Section V.10. Provisions in Case of Reclassification, Consolidation,
--------------
Merger or Sale of Assets.
------------------------
In the case of any capital reorganization or any reclassification of
the Common Stock, or in the case of the consolidation or merger of the Company
with or into any other corporation or in case of any sale or transfer of all or
substantially all of the assets of the Company as may be permitted by the
provisions hereof, each Holder of any Outstanding Debentures shall have the
right thereafter to convert the principal amount of each such Debenture into the
kind and amount of shares of stock and other securities and property receivable
upon such reorganization, reclassification, consolidation, merger, sale or
transfer by a holder of the number of shares of Common Stock of the Company into
which such Debenture might have been converted immediately prior to such
reorganization, reclassification, consolidation, merger, sale or transfer; and,
in any such case, appropriate adjustment (as determined in good faith by the
Board of Directors of the Company) shall be made in the application of the
provisions of this Article V (including provisions with regard to the adjustment
of the Conversion Price) in order that the rights and interests of the holders
thereafter shall be as nearly equivalent as may be practicable to the rights and
interests provided for in this Article V.
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In case of any consolidation or merger of the Company with or into any
other corporation (other than a consolidation or merger in which the Company is
the continuing corporation), or in case of any sale or transfer of all or
substantially all of the assets of the Company, the corporation formed by such
consolidation or the corporation into which the Company shall have been merged
or the corporation which shall have acquired such assets, as the case may be,
shall execute and deliver to the Trustee a supplemental indenture providing for
the rights of the Holders as set forth in the preceding paragraph.
Neither the Trustee, any Paying Agent nor any Conversion Agent shall
be under any responsibility to determine the correctness of any provisions
contained in any such supplemental indenture relating either to the kind or
amount of shares of stock or other securities or property or cash receivable by
Holders of Debentures upon the conversion of their Debentures after any such
consolidation, merger, conveyance, transfer, sale or lease or to any such
adjustment, but may accept as conclusive evidence of the correctness of any such
provisions, and shall be protected in relying upon, an Opinion of Counsel with
respect thereto, which the Company shall cause to be furnished to the Trustee
upon request.
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ARTICLE VI
COVENANTS
The Company covenants that so long as the Debentures are Outstanding:
Section VI.1. Payment of Principal and Interest on Debentures.
----------
The Company will duly and punctually pay, or cause to be paid, the
principal of, premium, if any, and interest on each of the Debentures at the
time and place and in the manner provided in the Debentures, the Coupons and
this Indenture. The interest due on the Debentures on or before the Maturity
Date, other than Additional Amounts payable as provided in Section 6.4 in
respect of principal of such a Debenture, shall be payable only upon
presentation and surrender of the Coupons for such interest installments as they
mature. The Company will deposit, or cause to be deposited, with the Trustee or
a Paying Agent, one Business Day prior to the Maturity Date of any Debenture and
one Business Day prior to the Interest Payment Date for any installment of
interest, all payments so due, which payments shall be in immediately available
funds on the Maturity Date or Interest Payment Date, as the case may be.
Section VI.2. Maintenance of Offices for Agencies.
-----------------------------------
The Company hereby appoints (a) the Corporate Trust Office of the
Trustee as its agent where Debentures and Coupons may be presented or
surrendered for payment in the circumstances described below (and not
otherwise), where Debentures may be surrendered for conversion in the
circumstances described below (and not otherwise) and where notices and demands
to or upon the Company in respect of the Debentures and Coupons and this
Indenture may be served, and (b) the principal office of the Luxembourg Agent as
its agent outside of the United States where, subject to any applicable laws or
regulations, Debentures and Coupons may be presented and surrendered for
payment, and where Debentures may be surrendered for conversion. As provided in
the form of Definitive Debentures set forth in Section 2.2(a), payment of
principal of or interest on Definitive Debentures, including any Additional
Amounts payable on Definitive Debentures pursuant to the provisions of the form
of Definitive Debenture set forth in Section 2.2(a), may be made, and Definitive
Debentures may be surrendered for conversion, at the Corporate Trust Office of
the Trustee if (but only if) payment of the full amount of such principal,
interest or Additional Amounts, or surrender of Definitive Debentures for
conversion, as the case may be, at all offices outside the United States
maintained for such purpose by the Company in accordance with this Indenture is
illegal or effectively precluded by exchange controls or other similar
restrictions on the full payment or receipt of such amounts in United States
Dollars, as determined by the Company.
The Company may at any time and from time to time vary or terminate
the appointment of any such agent or appoint any additional agents for any or
all of such purposes; provided, however, that until all of the Debentures have
been delivered to the Trustee for
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cancellation, or moneys sufficient to pay the principal of and interest on the
Debentures have been made available for payment and either paid or returned to
the Company pursuant to the provisions of Section 6.3, the Company will maintain
(1) in the City of Denver, Colorado, an office or agency where Definitive
Debentures and Coupons may be presented or surrendered for payment, where
Debentures may be surrendered for exchange or conversion in the circumstances
described in the last sentence of the first paragraph of this Section 6.2 (and
not otherwise), and where notices and demands to or upon the Company in respect
of the Debentures and Coupons and this Indenture may be served, and (2) subject
to any laws or regulations applicable thereto, in any city in a Western European
country, an office or agency where Debentures and Coupons may be presented and
surrendered for payment, where Debentures may be presented for exchange or
conversion; and provided, further, that so long as the Debentures are listed on
the Luxembourg Stock Exchange and the rules of such stock exchange shall so
require, the Company will maintain a Paying Agent and Conversion Agent in
Luxembourg. The Company will give prompt written notice to the Trustee, and
notice to the Holders in accordance with Section 16.5, of the appointment or
termination of any such agents and of the location and any change in the
location of any such office or agency.
If at any time the Company shall fail to maintain any such required
office or agency, or shall fail to furnish the Trustee with the address thereof,
presentations and surrenders may be made and notices and demands may be served
on the Corporate Trust Office of the Trustee, except that Definitive Debentures
and Coupons may be presented and surrendered for payment and conversion to the
Paying Agent at its office in Luxembourg, Duchy of Luxembourg, or other Paying
Agent or Conversion Agent outside the United States, and the Company hereby
appoints the Paying Agent as its agent to receive such respective presentations,
surrenders, notices and demands.
Section VI.3. Money for Payments to Be Held in Trust.
--------------------------------------
If the Company shall at any time act as its own Paying Agent, it will,
on or before each due date of the principal of, premium, if any, or interest on
any of the Debentures and Coupons, segregate and hold in trust for the benefit
of the Persons entitled thereto a sum sufficient to pay the principal, premium,
if any, or interest so becoming due until such sums shall be paid to such
Persons or otherwise disposed of as herein provided and will promptly notify the
Trustee of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents for the
Debentures, it will, on the Business Day immediately preceding each due date of
the principal of or interest on the Debentures, deposit with a Paying Agent a
sum sufficient to pay the principal, premium, if any, or interest so becoming
due, such sum to be held in trust for the benefit of the Persons entitled to
such principal, premium, if any, or interest, and (unless such Paying Agent is
the Trustee) the Company will promptly notify the Trustee of such action or any
failure so to act.
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The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which such sums were held by the Company or
such Paying Agent; and, upon such payment by any Paying Agent to the Trustee,
such Paying Agent shall be released from all further liability with respect to
such sums.
Any money deposited with the Trustee or any Paying Agent, or then held
by the Company, in trust for the payment of the principal of, premium, if any,
or interest on any Debenture and remaining unclaimed for two years after such
principal or interest has become due and payable shall be paid to the Company on
Company Request, or (if then held by the Company) shall be discharged from such
trust; and the Holder of such Debenture shall thereafter, as an unsecured
general creditor, look only to the Company for payment thereof, and all
liability of the Trustee or such Paying Agent with respect to such trust money,
and all liability of the Company as trustee thereof, shall thereupon cease.
Section VI.4. Taxes, Assessments, Governmental Charges and Certain
-----------
Claims.
------
The Company will pay and discharge, and shall cause each Subsidiary to
pay and discharge, before the same become in default, (a) all Taxes imposed upon
it or its income or profits or upon any of its assets or any part thereof and
(b) all lawful claims against it for labor, materials and supplies or otherwise,
which if unpaid might become a Lien on such assets or any part thereof or
otherwise, excluding any such Tax or claim, the amount, applicability or
validity of which is being timely contested in good faith by appropriate
proceedings.
Section VI.5. Reporting Requirements.
----------------------
The Company shall deliver to the Trustee:
(a) copies of information, documents and reports as described
in, and in accordance with, Section 6.18; and
(b) promptly upon the Company obtaining knowledge of (1) an
Event of Default or Default, an Officer's Certificate specifying in reasonable
detail the nature and period of existence thereof and what action the Company
proposes to take with respect thereto or (2) a material adverse change in the
financial condition or operation of the Company and its Subsidiaries, an
Officer's Certificate setting forth in reasonable detail the nature and amount
of such change and the action the Company proposes to take with respect thereto.
Section VI.6. Books and Records.
-----------------
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The Company shall, and shall cause each of its Subsidiaries to, keep
its books, records and accounts in accordance with GAAP applied on a basis
consistent with preceding years.
Section VI.7. Maintenance of Insurance.
------------------------
The Company shall maintain, and shall cause each Subsidiary to
maintain, with financially sound and responsible insurers, insurance with
respect to its properties and business against such casualties and contingencies
and in such amounts as are customary in the case of similarly situated
corporations engaged in the same or similar businesses.
Section VI.8. Maintenance of Corporate Existence, Properties, Etc.
----------------
Except to the extent otherwise permitted by this Indenture, the
Company shall, and shall cause each Subsidiary to, (i) do or cause or cause to
be done all things reasonably necessary to preserve, renew and keep in full
force and effect its corporate existence,(ii) at all times maintain, preserve
and protect all of its patents, trademarks, service marks, trade names, service
names, copyrights, licenses, permits, franchises and other rights, including
distributorship and franchise agreements, that continue to be useful in some
material respect to its business, and (iii) preserve all the remainder of its
property useful in the conduct of its business and keep the same in good repair,
working order and condition (ordinary wear and tear excepted), and from time to
time, make, or cause to be made, all needful and proper repairs, renewals,
replacements, betterments and improvements thereto so that the business carried
on in connection therewith may be properly and advantageously conducted at all
times; provided, that nothing in this Section 6.8 shall prevent the Company or
any Subsidiary from discontinuing the use, operation or maintenance of any of
such properties, or disposing of any of them, if such discontinuance or disposal
is, in the judgment of the Board of Directors or the board of directors of such
Subsidiary, or of any executive officer of the Company or such Subsidiary, as
applicable, having managerial responsibility for any such property, desirable in
the conduct of the business of the Company or such Subsidiary.
Section VI.9. Type of Business.
----------------
The Company shall, and shall cause each Subsidiary to, remain in
substantially the same businesses in which the Company and its Subsidiaries are
engaged as of the date of this Indenture or in such other types of businesses
that are reasonably related or incidental thereto.
Section VI.10. Merger or Sale of Assets.
------------------------
The Company shall not, and shall not permit any Subsidiary to, merge,
consolidate or exchange shares with any other corporation, or sell, lease or
transfer or otherwise dispose of any of its assets to any Person, other than
sales, leases, transfers or other dispositions
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of inventory in the ordinary course of business or particular items of obsolete
or unnecessary equipment in the ordinary course of business, except
(a) any Subsidiary may merge or consolidate with the Company;
(b) any Subsidiary may sell, lease, transfer or otherwise dispose of
all or substantially all of its assets to the Company or another Subsidiary;
(c) the Company or a Subsidiary may enter into one or more
transactions constituting Strategic Alliances; and
(d) as otherwise permitted by this Indenture; and
(e) the Company may allow TCK to increase the percentage of its
ownership of Common Stock pursuant to Warrant A and another warrant ("Warrant
B") issued to TCK by the Company.
Section VI.11. Investments.
-----------
The Company shall not, and shall not permit any Subsidiary to, make or
have outstanding any loan or advance to, or own, purchase or acquire any
obligations (other than accounts receivable generated in the ordinary course of
business) or Securities of, or any interest in, or make any capital contribution
to or acquire all or substantially all of the assets of, any other Person, other
than to: (a) acquire and own obligations or Securities received in settlement of
debt created in the ordinary course of business that is owing to the Company or
such Subsidiary; (b) own, purchase or acquire (i) commercial paper, banker's
acceptances or certificates of deposit issued by any United States commercial
bank having a combined capital and surplus of at least $500 million or enter
into repurchase agreements with such banks with respect to obligations described
in this clause (b)(i), (ii) commercial paper of reputable issuers located in the
United States, which obligations have a short-term rating of A-1 or better by
Standard & Poor's Corporation or P-1 by Moody's Investors Service, Inc., (iii)
obligations of the United States government or any agency thereof, (iv)
obligations guaranteed by the United States government or any agency thereof, in
each case such obligations described in this clause (b) to be due within 270
days from the date of acquisition, and (v) shares of open end management
companies registered under the Investment Company Act of 1940, commonly known as
mutual funds or money market funds that invest solely in obligations of the
types described earlier in this clause (b), if the shares thereof are redeemable
at net asset value at any time; (c) endorse negotiable instruments for
collection or deposit in the ordinary course of business; (d) own stock of
Subsidiaries; (e) acquire all or any portion of the assets, Securities or other
ownership interests of any other Person in a transaction constituting a
Strategic Alliance; and (f) redemption of the Debentures as permitted by this
Indenture.
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Section VI.12. Use of Proceeds.
---------------
The Company shall use the proceeds from the sale of the Debentures as
specified in the Offering Memorandum pursuant to which the Debentures were
offered for sale.
Section VI.13. Dividends, Etc.
---------------
The Company will not declare or pay any dividend on its capital stock
(other than stock dividends), and the Company will not, and will not permit any
Subsidiary to, except as expressly permitted by this Indenture, purchase,
redeem, retire or acquire any capital stock, convertible securities or
subordinated debt of the Company or such Subsidiary or another Subsidiary or any
option, warrant or other right to acquire any such capital stock, convertible
securities or subordinated debt.
Section VI.14. Additional Indebtedness.
-----------------------
The Company will not, and will not permit any Subsidiary, to in any
way, directly or indirectly, create, incur, assume, guaranty, suffer to exist,
agree to purchase or repurchase, pay or provide funds in respect of, or
otherwise become, be or remain liable, contingently, directly or indirectly,
with respect to any Indebtedness, except, without duplication, (a) the
Debentures; (b) unsecured Indebtedness of the Company and its Subsidiaries on a
consolidated basis, not to exceed the difference, if any, between the $25
million and the aggregate principal amount of the Debentures at the time
Outstanding; (c) Project Finance Indebtedness; and (d) Indebtedness in an amount
sufficient to redeem all Outstanding Debentures in the event the Company elects
to effect such redemption by reason of a Tax Law Change.
Section VI.15. Limitation on Liens.
-------------------
The Company will not, and will not permit any Subsidiary to, create,
incur, assume or permit to exist any Lien on any asset of the Company or such
Subsidiary or on any income or profits of the Company or such Subsidiary, except
for Permitted Liens.
Section VI.16. Compliance with Laws, Etc.
--------------------------
The Company will comply, and will cause each of its Subsidiaries to
comply, in all material respects, with all Requirements of Law and Contractual
Obligations applicable to or binding upon any of them.
Section VI.17. Reports from the Company.
------------------------
(a) The Company will file with the Trustee within 15 days
after the date by which the Company is required to file the same with the
Commission (including any extension of time to which the Company is entitled),
copies of the annual reports and of the
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information, documents and other reports (or copies of such portions of any of
the foregoing as the Commission may from time to time by rules and regulations
prescribe) which the Company may be required to file with the Commission
pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if the Company
is not required to file information, documents or reports pursuant to either of
such sections, then to file with the Trustee and the Commission, in accordance
with rules and regulations prescribed from time to time by the Commission, such
of the supplementary and periodic information, documents and reports which may
be required pursuant to Section 13 of the Exchange Act in respect of a security
listed and registered on a national securities exchange as may be prescribed
from time to time in such rules and regulations.
(b) The Company will file with the Trustee and the
Commission, in accordance with the rules and regulations prescribed from time to
time by the Commission, such additional information, documents and reports with
respect to compliance by the Company with the conditions and covenants provided
for in this Indenture as may be required from time to time by such rules and
regulations.
Section VI.18. Registration and Listing.
------------------------
Within a reasonable time after the issuance of the Global Debenture
(not to exceed 45 days from the date of the final closing of the offering of the
Debenture pursuant to the Offering Memorandum), the Company (a) will effect all
registrations with, and obtain all approvals by, all governmental authorities
that may be necessary under applicable United States Federal or state law
(including the Securities Act, the Exchange Act and state securities and blue
sky laws) before the shares of Common Stock issuable upon conversion of the
Debentures may be lawfully issued and delivered, and thereafter publicly traded
(if permissible under the Securities Act), and qualified or listed as
contemplated by clause (b); and (b) will list the shares of Common Stock
required to be issued and delivered upon conversion of the Debentures prior to
such issuance or delivery on each national securities exchange on which
outstanding Common Stock is listed at the time of such delivery and if
outstanding Common Stock is not listed on any national securities exchange or is
not so qualified at the time of such delivery, to use its reasonable best
efforts to qualify such shares prior to such delivery for quotation through the
NASDAQ National Market System.
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Section VI.19. Statement by Officers as to Default.
-----------------------------------
The Company will deliver to the Trustee within 120 days after the end
of each fiscal year, an Officers' Certificate stating (a) that in the course of
performing by the signers duties as such officers of the Company, they would
normally obtain knowledge of (i) whether or not any Default exists in the
performance and observation of any terms, provisions and conditions of this
Indenture and (ii) whether or not the Company has otherwise kept, observed,
performed and fulfilled its obligations under this Indenture in all material
respects; (b) to the knowledge of such officers, as of the date of such
Officers' Certificate, (i) whether or not any Default exists, (ii) whether or
not the Company during the preceding fiscal year kept, observed, performed and
fulfilled, in all material respects, each and every covenant and obligation of
the Company under this Indenture; and (c) whether or not there was any Default
in the performance and observance by the Company of any of the terms, provisions
or conditions of this Indenture during such preceding fiscal year. If the
officers signing the Officers' Certificate know of such a Default, whether then
existing or occurring during such preceding fiscal year, the Officers'
Certificate shall describe such Default and its status with particularity. The
Company shall also promptly notify the Trustee if the Company's fiscal year is
changed so that the end thereof is on any date other than the then current
fiscal year end date. For purposes of this Section 6.20, such compliance shall
be determined without regard to any period of grace granted by the Trustee or
requirement of notice under this Indenture. Notwithstanding the foregoing, the
Company will deliver to the Trustee, within fifteen Business Days after becoming
aware of any Default or Event of Default, an Officers' Certificate specifying
with particularity such Default or Event of Default and further stating what
action the Company has taken or is taking or proposes to take with respect
thereto.
Section VI.20. Additional Amounts.
------------------
The Company will pay to the Holder of any Debenture or any Coupon
appertaining thereto Additional Amounts as provided in the form of Definitive
Debenture set forth in Section 2.2(a). Whenever in this Indenture there is a
reference, in any context, to the payment of the principal of, premium, if any,
or interest on, or in respect of, any Debenture or any Coupon, such reference
shall be deemed to include the payment of Additional Amounts provided for in
this Section 6.21 to the extent that, in such context, Additional Amounts are,
were or would be paying in respect thereof pursuant to the provisions of this
Section 6.21, and express reference to the payment of Additional Amounts (if
applicable) in any provisions hereof shall not be construed as excluding
Additional Amounts in those provisions hereof where such express reference is
not made.
At least 10 days prior to the Exchange Date, or an earlier Redemption
Date (and at least 10 days prior to each date of payment of principal, premium,
if any, or interest after the Exchange Date, or an earlier Redemption Date or
Repurchase Date, if there has been any change with respect to the matters set
forth in the Officers' Certificate referred to below), the Company
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will furnish the Trustee and any Paying Agents, with an Officers' Certificate
instructing the Trustee and such Paying Agents whether such payment of principal
of, premium, if any, or interest on the Debentures shall be made to Holders of
Debentures or Coupons who are not United States Persons without withholding for
or on account of any tax, assessment or other governmental charge described in
the second paragraph of the face of the form of Definitive Debenture set forth
in Section 2.2(a). If any such withholding shall be required, then such
Officers' Certificate shall specify by country the amount, if any, required to
be withheld on such payments to such Holders of Debentures or Coupons and the
Company will pay to the Trustee or the Paying Agent the Additional Amounts
required by this Section to be paid in the event of any such withholding. The
Company covenants to indemnify the Trustee and any Paying Agent for, and to hold
them harmless against any loss, liability or expense arising out of or in
connection with actions taken or omitted by any of them in reliance on any
Officers' Certificate furnished pursuant to this Section, except to the extent
such loss, liability or expense is attributable to the Trustee's negligence or
bad faith.
ARTICLE VII
REMEDIES OF THE TRUSTEE AND HOLDER of DEBENTURES
ON EVENT OF DEFAULT
Section VII.1. Events of Default Defined.
-------------------------
An Event of Default Occurs if:
(a) default for 30 days in the due and punctual payment of
any installment of interest (including any Additional Amount) upon any of the
Debentures as and when the same shall become due and payable; or
(b) default in the due and punctual payment of the
principal of, and premium, if any, on, any of the Debentures as and when the
same shall become due and payable either at maturity, upon redemption, by
declaration as authorized by this Indenture, or otherwise; or
(c) failure on the part of the Company to observe or
perform any of the covenants or agreements on the part of the Company in the
Debentures or in this Indenture, not otherwise referred to in another paragraph
of this Section 7.1, after the date on which written notice of such failure,
requiring the same to be remedied, shall have been given to the Company by the
Trustee or to the Trustee and the Company by the Holders of at least 25% in
aggregate principal amount of the then Outstanding Debentures; or
(d) a material default shall occur under (i) any bond,
debenture, note or other evidence of Indebtedness by the Company or a Subsidiary
or (ii) any mortgage, indenture, credit or loan agreement or other instrument
under which there
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may be issued or by which there may be secured or evidenced any Indebtedness by
the Company or such Subsidiary, whether such Indebtedness now exists or shall
hereafter be created, which default shall constitute a failure to pay any
portion of the principal of, premium, if any, and interest on such Indebtedness
when due and payable after the expiration of any applicable grace period with
respect thereto, or a default shall occur in the performance of any other
covenant or condition contained in any such evidence of Indebtedness or
mortgage, indenture, credit or loan agreement or other instrument if the effect
of such default is to entitle (after giving effect to any applicable notice or
applicable cure rights) the holder of such evidence of indebtedness or creditor
(or a trustee for such holders or creditors) to then cause such Indebtedness to
become due prior to its stated maturity, or if such default shall have resulted
in such indebtedness becoming or being declared due and payable prior to the
date on which it would otherwise have become due and payable, without such
Indebtedness having been discharged; or
(e) a final judgment or final judgments for the payment of
money are entered by a court or courts of competent jurisdiction against the
Company and/or any Subsidiary and such judgment or judgments remain unstayed or
undischarged for a period of 60 days, provided that the aggregate of all such
judgments exceeds U.S.$1,000,000; or
(f) the Company or a Subsidiary shall (1) apply for or
consent to the appointment of, or the taking of possession by, a receiver,
custodian, trustee or liquidator of the Company or any such Subsidiary or of all
or a substantial part of the property of the Company or any such Subsidiary, (2)
admit in writing the inability of the Company or any such Subsidiary, or be
generally unable, to pay its debts as such debts become due, (3) make a general
assignment for the benefit of its creditors, (4) commence a voluntary case under
the Bankruptcy Code (as now or hereafter in effect), (5) file a petition seeking
to take advantage of any other law relating to bankruptcy, insolvency,
reorganization, winding-up, or composition or adjustment of debts, (6) fail to
controvert in a timely or appropriate manner, or acquiesce in writing to, any
petition filed against such Person in an involuntary case under the Bankruptcy
Code or other similar law, or (7) take any action for the purpose of effecting
any of the foregoing; or
(g) a proceeding or case shall be commenced, without the
application of the Company or any Subsidiary, in any court of competent
jurisdiction, seeking (1) the liquidation, reorganization, dissolution, winding-
up or composition or readjustment of debts of the Company or any such
Subsidiary, (2) the appointment of a trustee, receiver, custodian, liquidator or
the like of the Company or any such Subsidiary or of all or any substantial part
of the assets of the Company or any such Subsidiary, or (3) similar relief in
respect of the Company or any such Subsidiary, under any law relating to
bankruptcy, insolvency, reorganization, winding-up or composition and adjustment
of debts, and such proceeding or case shall continue undismissed, or an order,
judgment or decree approving or ordering any of the foregoing shall be entered
and continue in effect, for a period of 60 days from commencement of such
proceeding or case or the date of such order, judgment or decree, or any order
for relief against the Company or any such Subsidiary shall be entered in an
involuntary case or proceeding under the Bankruptcy Code; or
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(h) any material provision of any Debenture, any Coupon or
this Indenture shall at any time for any reason cease to be valid and binding in
accordance with its terms on the Company, or the validity or enforceability
thereof shall be contested by the Company, or the Company shall terminate or
repudiate (or attempt to terminate or repudiate) any Debenture, Coupon or this
Indenture; or
(i) any representation, warranty or statement made by the
Company in any certificate, report, financial statement or other document
furnished to the Trustee or any Holder of a Debenture or Coupon pursuant to this
Indenture shall be false or misleading in any material respect on the date as of
which made or deemed made;
then and in each and every such case (other than an Event of Default specified
in Section 7.1(f) and (g)), unless the principal of all the Debentures shall
have already become due and payable, either the Trustee or the holders of at
least 51% in aggregate principal amount of the Outstanding Debentures hereunder,
by notice in writing to the Company (and to the Trustee if given by the Holders
of Debentures), may declare the principal of and interest accrued on all the
Debentures then outstanding to be due and payable immediately, and upon any such
declaration the same shall become and shall be immediately due and payable,
anything in this Indenture or in such Debentures contained to the contrary
notwithstanding. If an Event of Default specified in Sections 7.1(f) or (g)
occurs, all unpaid principal, premium and interest on all the Debentures then
outstanding shall ipso facto become and shall be immediately due and payable
----------
without any declaration or other act on the part of the Trustee or any Holders
of Debentures.
This provision is subject to the condition that if, at any time after
the principal of and interest accrued on the Debentures shall have been so
declared due and payable, but before the Debentures shall have become due by
their terms and before any judgment or decree for the payment of the moneys due
shall have been obtained or entered as hereinafter provided, the Company shall
pay or shall deposit with the Trustee a sum of money sufficient to pay all
matured installments of interest upon all the Debentures then outstanding and
the principal of any and all Debentures then outstanding that shall have become
due otherwise than by declaration (with interest upon such principal and, to the
extent that payment of such interest is enforceable under applicable law, upon
overdue installments of interest, at the rate per annum expressed in all
Debentures to the date of such payment or deposit) and all amounts payable to
the Trustee under Section 8.6, and any and all defaults under the Indenture,
other than the nonpayment of principal and interest on Debentures then
outstanding that shall not have become due by their terms, shall have been
remedied or provision shall have been made therefor to the satisfaction of the
Trustee, then and in every such case the holders of a majority in aggregate
principal amount of the Outstanding Debentures, by written notice to the Company
and to the Trustee, may waive all defaults and rescind and annul such
declaration and its consequences; but no such waiver or rescission and annulment
shall extend to or shall affect any subsequent default or shall impair any right
consequent thereon.
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In case the Trustee or any Holder of a Debenture shall have proceeded
to enforce any right under this Indenture and such proceedings shall have been
discontinued or abandoned because of such rescission or annulment or for any
other reason or shall have been determined adversely to the Trustee or such
Holder, then, and in every such case, the Company, Trustee and the Holder of
Debentures shall be restored severally and respectively to their former
positions and rights hereunder, and all rights, remedies and powers of the
Company, the Trustee and the Holders of Debentures shall continue as though no
such proceedings had been taken.
Section VII.2. Covenant of Company to Pay to Trustee Whole Amount Due
on Debentures on Default in Payment of Interest,
Principal or Premium.
--------------------
The Company covenants that (1) in case default shall be made in the
payment of any installment of interest on any of the Debentures, as and when the
same shall become due and payable, and such default shall have continued for a
period of 30 days, or (2) in case default shall be made in the payment of the
principal of any of the Debentures, or premium, if any, when the same shall have
become due and payable, whether upon maturity of the Debentures or upon
redemption or upon declaration as authorized by this Indenture or otherwise,
then, upon demand of the Trustee, the Company shall pay in cash to the Trustee,
for the benefit of the Holders of the Debentures and Coupons then outstanding,
the whole amount that then shall have become due and payable on all such
Debentures and Coupons for principal, premium, if any, or interest (including
any Additional Amounts), as the case may be, with interest upon any overdue
principal, and (to the extent that payment of such interest is enforceable under
applicable law) upon overdue installments of interest (including any Additional
Amounts) at the rate per annum expressed in the Debentures; and, in addition
thereto, such further amount as shall be sufficient to cover the costs and
expenses of collection and all amounts payable to the Trustee under Section 8.6.
In case the Company shall fail forthwith to pay such amounts upon such
demand, the Trustee, in its own name and as trustee of an express trust, shall
be entitled and empowered to institute any action or proceeding at law or in
equity for the collection of the sums so due and unpaid, and may prosecute any
such action or proceeding to judgment or final decree, and may enforce any such
judgment or final decree against the Company or other obligor upon the
Debentures and collect in the manner provided and to the extent permitted by law
out of property of the Company or other obligor upon the Debentures wherever
situated the moneys adjudged or decreed to be payable.
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Section VII.3. Trustee May File Proofs of Claim.
--------------------------------
The Trustee shall be entitled and empowered, either in its own name or
as trustee of an express trust, or as attorney-in-fact for the Holders of the
Debentures and any Coupons, or in any one or more of such capacities, to file
such proof of debt, amendment of proof of debt, claim, petition or other
document as may be necessary or advisable in order to have the claims of the
Trustee and the Holders of the Debentures and Coupons allowed in any equity
receivership, insolvency, bankruptcy, liquidation, readjustment, reorganization
or other judicial proceedings relative to the Company or any other obligor on
the Debentures or their creditors, or affecting their property. The Trustee is
hereby irrevocably appointed (and the successive respective Holders of the
Debentures and any Coupons by taking and holding the same shall be conclusively
deemed to have so appointed the Trustee) the true and lawful attorney-in-fact of
the respective Holders of the Debentures and any Coupons, with authority to make
and file in the respective names of the Holders of the Debentures and Coupons or
on behalf of the Holders of the Debentures and Coupons as a class, subject to
deduction from any such claims of the amounts of any claims filed by any of the
Holders of the Debentures and Coupons themselves, any proof of debt, amendment
of proof of debt, claim, petition or other document in any such proceedings and
to receive payment of any sums becoming distributable on account thereof, and to
execute any such other papers and documents and to do and perform any and all
such acts and things for and on behalf of such Holders of the Debentures and
Coupons as may be necessary or advisable in the opinion of the Trustee in order
to have the respective claims of the Trustee and of the Holders of the
Debentures and Coupons against the Company or its property allowed in any such
proceeding, and to receive payment of or on account of such claims; provided
that nothing contained in this Indenture shall be deemed to give to the Trustee
any right to accept or consent to any plan of reorganization or otherwise by
action of any character in any such proceeding to waive or change in any way any
right of any Holder of a Debenture or Coupons.
All rights of action and of asserting claims under this Indenture, or
under any of the Debentures and Coupons, may be enforced by the Trustee without
the possession of any of the Debentures and Coupons or the production thereof on
any trial or other proceeding relative thereto, and any such suit or proceeding
instituted by the Trustee shall be brought in its own name as trustee of an
express trust, and any recovery of judgment shall be for the ratable benefit of
the Holders of the Debentures and Coupons, subject to the provisions of this
Indenture. In any proceedings brought by the Trustee (and also any proceedings
in which a declaratory judgment of a court may be sought as to the
interpretation or construction of any provision of this Indenture, to which the
Trustee shall be a party) the Trustee shall be held to represent all the Holders
of the Debentures and Coupons, and it shall not be necessary to make any Holders
of the Debentures and Coupons parties to any such proceedings.
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Section VII.4. Application of Moneys Collected by Trustee.
-------
Any moneys collected by the Trustee, pursuant to Section 7.2, shall be
applied in the following order, at the date or dates fixed by the Trustee, upon
presentation of the several Debentures, and the notation thereon of the payment,
if only partially paid, and upon surrender thereof if fully paid:
First: To the payment of costs and expenses of collection and of all
amounts payable to the Trustee under Section 8.6;
Second: To the payments of the amounts then due for principal,
premium, if any, and interest on the Debentures and Coupons, and interest on
overdue principal and premium, if any, and (so far as may be lawful and if such
interest has been collected by the Trustee) upon overdue installments of
interest at the rate per annum expressed in the Debentures; and in case such
moneys shall be insufficient to pay in full the whole amount so due and unpaid
upon the Debentures and Coupons, then to the payment, ratably to the aggregate
of such principal, premium, if any, and accrued and unpaid interest; and
Third: To the payment of the remainder, if any, to the Company, its
successors or assigns, or to whomsoever may be lawfully entitled to receive the
same, or as a court of competent jurisdiction may direct.
Section VII.5. Limitation on Suits.
-------------------
No Holder of any Debenture or Coupon shall have any right to institute
any proceeding, judicial or otherwise, with respect to this Indenture, or for
the appointment of a receiver or trustee, or for any other remedy hereunder,
unless:
(a) such Holder has previously given written notice to the Trustee of
a continuing Event of Default;
(b) the holders of not less than 25% in principal amount of the
Outstanding Securities shall have made written request to the Trustee to
institute proceedings in respect of such Event of Default in its own name
as Trustee hereunder;
(c) such Holder or Holders have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
compliance with such request;
(d) the Trustee for 60 days after its receipt of such notice, request
and offer of indemnity has failed to institute any such proceeding; and
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(e) no direction inconsistent with such written request has been
given to the Trustee during such 60-day period by the Holders of a majority in
principal amount of the Outstanding Securities;
it being understood and intended that no one or more of such Holders shall have
any right in any manner whatever by virtue of, or by availing of, any provision
of this Indenture to affect, disturb or prejudice the rights of any other of
such Holders, or to obtain or seek to obtain priority or preference over any
other of such Holders or to enforce any right under the Indenture, except in the
manner herein provided and for the equal and ratable benefit of all such
Holders.
Section VII.6. Unconditional Right of Holders to Receive Principal,
Premium and Interest and to Convert.
--------------
Notwithstanding any other provision in this Indenture, the Holder of
any Debenture or Coupon shall have the right, which is absolute and
unconditional, to receive payment of the principal of, and premium, if any, on
such Debenture or payment of such Coupon on the respective maturities expressed
in such Debenture or Coupon (or, in the case of redemption or repurchase, on the
Redemption Date or Repurchase Date, as the case may be), and to convert such
Debenture in accordance with Article V, and to institute suit for the
enforcement of any such payment and right to convert, and such rights shall not
be impaired without the consent of such Holder.
Section VII.7. Restoration of Rights and Remedies.
----------------------------------
If the Trustee or any Holder of a Debenture or Coupon has instituted
any proceeding to enforce any right or remedy under this Indenture and such
proceeding has been discontinued or abandoned for any reason, or has been
determined adversely to the Trustee or to such Holder, then and in every such
case, subject to any determination in such proceeding, the Company, the Trustee
and the Holders of Debentures and Coupons shall be restored severally and
respectively to their former positions hereunder and thereafter all rights and
remedies of the Trustee and such Holders shall continue as though no such
proceeding had been instituted.
Section VII.8. Rights and Remedies Cumulative.
------------------------------
Except as otherwise provided with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Debentures or Coupons in the
last paragraph of Section 3.5, no right or remedy herein conferred upon or
reserved to the Trustee or to the Holders of Debentures or Coupons is intended
to be exclusive of any other right or remedy, and every right and remedy shall,
to the extent permitted by law, be cumulative and in addition to every other
right and remedy given hereunder or now or hereafter existing at law or in
equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
Section VII.9. Delay or Omission Not Waiver.
----------------------------
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No delay or omission of the Trustee or of any Holder of any Debenture
or Coupon to exercise any right or remedy accruing upon any Event of Default
shall impair any such right or remedy or constitute a waiver of any such Event
of Default or any acquiescence therein. Every right and remedy given by this
Article VII or by law to the Trustee or to the Holders of Debentures or Coupons
may be exercised from time to time, and as often as may be deemed expedient, by
the Trustee or (subject to the limitations contained in this Indenture) by the
Holders of Debentures or Coupons, as the case may be.
Section VII.10. Rights of Holders of Majority in Principal Amount of
Debentures to Direct Trustee and Waive Defaults.
---------------------------
Subject to the provisions of Sections 8.1 and 8.2, the Holders of a
majority in aggregate principal amount of the Outstanding Debentures shall have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee, or exercising any trust or power conferred
on the Trustee; provided that (a) such direction shall be in accordance with law
and the provisions of this Indenture; (b) the Trustee shall have the right,
subject to the provisions of Section 8.1, to decline to follow any such
direction if the Trustee shall, being advised by an Opinion of Counsel,
determine that the action so directed may not be lawfully taken, or if the
Trustee in good faith shall, by a Responsible Officer, determine that the
proceeding so directed would be illegal or involve it in personal liability or
that the action so directed would be unduly prejudicial to the Holders of
Debentures not taking part in such direction; and (c) the Holders of a majority
in aggregate principal amounts of the Outstanding Debentures shall provide
adequate indemnity to the Trustee; and provided, further, that nothing in this
Indenture shall impair the right of the Trustee to take any action deemed proper
by the Trustee and that is not inconsistent with such direction by the Holders
of the Debentures.
Section VII.11. Waiver of Past Defaults.
-----------------------
The Holders of not less than a majority in aggregate principal amount
of the Outstanding Debentures may, on behalf of the Holders of all the
Debentures and Coupons, waive any past Default hereunder and its consequences,
except a Default (a) in the payment of the principal of or interest on any
Debenture, or (b) in respect of a covenant or provision hereof which under
Article XI cannot be modified or amended without the consent of the Holders of
each Outstanding Security affected.
Upon any such waiver, such Default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other Default or impair any right consequent thereon.
Section VII.12. Undertaking for Costs.
---------------------
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All parties to this Indenture agree, and each Holder of any Debenture
or Coupon, by his acceptance thereof, shall be deemed to have agreed, that any
court may in its discretion require, in any suit for the enforcement of any
right or remedy under this Indenture, or in any suit against the Trustee for any
action taken, suffered or omitted by it as Trustee, the filing by any party
litigant in such suit of an undertaking to pay the costs of such suit, and that
such court may in its discretion assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in such suit, having due regard to
the merits and good faith of the claims or defenses made by such party litigant;
but the provisions of this Section 7.12 shall not apply (a) to any suit
instituted by the Trustee; (b) to any suit instituted by any Holder, or group of
Holders, holding in the aggregate more than 10% in principal amount of the
Outstanding Debentures; or (c) to any suit instituted by any Holder of any
Debenture or Coupon for the enforcement of the payment of the principal of or
interest on any Debenture or the payment of any Coupon on or after the
respective stated maturity or maturities expressed in such Debenture or Coupon
(or, in the case of redemption, on or after the Redemption Date) or for the
enforcement of the right to convert any Security in accordance with Article V.
Section VII.13. Waiver of Usury, Stay or Extension Laws.
---------------------------------------
The Company covenants (to the extent that it may lawfully do so) that
it will not at any time insist upon, or plead, or in any manner whatsoever claim
or take the benefit of or advantage of, any usury, stay or extension law
wherever enacted, now or at any time hereafter in force, which may affect the
covenants or the performance of this Indenture; and the Company (to the extent
that it may lawfully do so) hereby expressly waives all benefit or advantage of
any such law and covenants that it will not hinder, delay or impede the
execution of any power herein granted to the Trustee, but will suffer and permit
the execution of every such power as though no such law had been enacted.
ARTICLE VIII
CONCERNING THE TRUSTEE
Section VIII.1. Certain Duties and Responsibilities.
-----------------------------------
(a) Except during the continuance of an Event of Default,
(1) the Trustee undertakes to perform such duties and only such
duties as are specifically set forth in this Indenture, and no implied covenants
or obligations shall be read into this Indenture against the Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of the
opinions expressed therein,upon certificates or opinions furnished to the
Trustee and conforming to the requirements of this Indenture; but in the case of
any such certificates or opinions which by any provision hereof are
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specifically required to be furnished to the Trustee, the Trustee shall be under
a duty to examine the same to determine whether or not they conform to the
requirements of this Indenture, but not to verify the contents thereof.
(b) In case an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in their exercise, as a
prudent man would exercise or use under the circumstances in the conduct of his
own affairs.
(c) No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act, or its own wilful misconduct, except that:
(1) this paragraph (c) shall not be construed to limit the effect of
paragraph (a) of this Section;
(2) the Trustee shall not be liable for any error of judgment made in
good faith by a Responsible Officer, unless the Trustee is determined to have
been negligent in ascertaining the pertinent facts;
(3) the Trustee shall not be liable with respect to any action taken
or omitted to be taken by it in good faith in accordance with the direction of
the Holders of a majority in principal amount of the Outstanding Debentures
relating to the time, method and place of conducting any proceeding for any
remedy available to the Trustee, or exercising any trust or power conferred upon
the Trustee, under this Indenture; and
(4) no provision of this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder, or in the exercise of any of its
rights or powers, if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it.
(d) Whether or not therein expressly so provided, every provision of
this Indenture relating to the conduct or affecting the liability of or
affording protection to the Trustee shall be subject to the provisions of this
Section.
Section VIII.2. Notice of Defaults.
------------------
Within 60 days after the occurrence of any Default hereunder as to
which the Trustee has received written notice, the Trustee shall give to all
Holders of Debentures, in the manner provided in Section 16.5, notice of such
Default, unless such Default shall have been cured or waived.
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Section VIII.3. Rights of Trustee.
-----------------
Except as otherwise provided in Section 8.1:
(a) In the absence of bad faith on the part of the Trustee, the
Trustee may rely and shall be protected in acting or refraining from acting upon
any Board Resolution, Officers' Certificate, certificate of independent public
accountants, or any other certificate, statement, instrument, opinion, report,
notice, Company Request, consent, Company Order, appraisal, bond, Debenture or
other paper or document believed by it to be genuine and to have been signed or
presented by the proper party or parties;
(b) The Trustee may consult with counsel, and an Opinion of
Counsel shall be full and complete authorization and protection in respect of
any action taken or suffered or omitted by it hereunder in good faith and in
accordance with such Opinion of Counsel;
(c) The Trustee shall be under no obligation to exercise any of
the trusts or powers vested in it by this Indenture at the request, order or
direction of any Holders of Debentures or Coupons pursuant to the provisions of
this Indenture, unless such Holders shall have offered to the Trustee reasonable
security and indemnity against the cost, expenses and liabilities which may be
incurred therein or thereby;
(d) The Trustee shall not be liable for any action taken or
omitted by it in good faith and believed by it to be authorized or within the
discretion or rights or powers conferred upon it by this Indenture;
(e) Prior to being notified of the occurrence of an Event of
Default hereunder and after the cure or waiver of all Events of Default which
may have occurred, the Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, order, approval, bond,
debenture, or other paper or document, unless requested in writing to do so by
the Holders of not less than a majority in aggregate principal amount of the
Outstanding Debentures; provided, however, that if the payment within a
reasonable time to the Trustee of the costs, expenses or liabilities likely to
be incurred by it in the making of such investigation is, in the opinion of the
Trustee, not reasonably assured to the Trustee by the security afforded to it by
the terms of this Indenture, the Trustee may require reasonable indemnity (and
security therefor) against such expense or liability as a condition to so
proceeding. The reasonable expense of every such investigation shall be paid by
the Company or, if paid by the Trustee, shall be repaid by the Company upon
demand; and
(f) The Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or through
agents or attorneys.
Section VIII.4. Trustee Not Liable for Recitals.
-------------------------------
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The recitals contained herein, in the Debentures (other than the
certificate of authentication on the Debentures), if any, and in the Coupons, if
any, shall be taken as the statements of the Company, and the Trustee assumes no
responsibility for the correctness or completeness of the same. The Trustee
makes no representations as to the validity, sufficiency or enforceability
(except as against the Trustee) of this Indenture, of the Debentures or of the
Coupons. The Trustee shall not be accountable for the use or application by the
Company of any of the Debentures or of the proceeds of such Debentures, or for
the use or application of any moneys paid over by the Trustee in accordance with
any provision of this Indenture, or for the use or application of any moneys
received by any Paying Agent other than the Trustee.
Section VIII.5. Trustee and Agents May Own Debentures.
-------------------------------------
The Trustee, any Authenticating Agent, any Paying Agent, any
Conversion Agent or other agent of the Company or the Trustee, in its individual
or any other capacity, may buy, own, hold and sell, as owner or pledgee,
Debentures and Coupons with the same rights it would have if it were not
Trustee, Paying Agent, Conversion Agent or any other agent of the Company or the
Trustee, and no such activity shall impair any of the Trustee's rights, remedies
or defenses, or enlarge any of its duties or liabilities under this Indenture.
Section VIII.6. Trustee Entitled to Compensation, Reimbursement and
-----------------
Indemnity.
---------
The Company covenants and agrees to pay to the Trustee from time to
time, and the Trustee shall be entitled to, reasonable compensation (which shall
not be limited by any provision of law in regard to the compensation of a
trustee of an express trust) for all services rendered by it hereunder, and the
Company shall pay or reimburse the Trustee, upon its request, for all reasonable
expenses, disbursements and advances incurred or made by the Trustee in
accordance with any of the provisions of this Indenture (including the
reasonable compensation and the expenses and disbursements of its counsel and of
all persons not regularly in its employ as well as any and all extraordinary
expenses, costs and fees incurred by the Trustee if an Event of Default shall
occur), except any such expense, disbursement or advance as may arise from the
Trustee's own negligence, bad faith or willful misconduct. If any property,
other than cash, shall at any time be subject to a Lien in favor of the Holders
of the Debentures or Coupons, the Trustee (if and to the extent authorized by a
receivership or bankruptcy court of competent jurisdiction or by a supplemental
instrument subjecting such property to such Lien), shall be entitled, but shall
not be obligated, to make advances for the purpose of preserving such property
or discharging tax liens or other prior liens or encumbrances thereon.
The Company covenants to indemnify the Trustee for, and to hold it
harmless against, any loss, liability or expense incurred without negligence,
bad faith or willful misconduct on the part of the Trustee, and arising out of
or in connection with the acceptance or administration of this trust, including
the costs and expenses of defending itself against any claim
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of liability in connection with the exercise or performance of any of its powers
or duties hereunder.
The obligations of the Company under this Section 8.6 to compensate
and indemnify the Trustee and to pay or reimburse the Trustee for expenses,
disbursements and advances shall constitute additional indebtedness hereunder
and shall survive the satisfaction and discharge of this Indenture. Such
additional indebtedness shall be secured by a lien prior to that of the
Debentures upon all property and funds held or collected by the Trustee as such,
except money or property held in trust for the benefit of the Holders of
particular Debentures or Coupons. When the Trustee incurs expenses or renders
services after an Event of Default specified in Section 7.1(f) or (g) occurs,
the expenses and the compensation for services are intended to constitute
expenses of administration under any bankruptcy law.
Section VIII.7. Right of Trustee to Rely on Certificate of Officers of
Company Where no Other Evidence Specifically
Prescribed.
Except as otherwise provided in Section 8.1, whenever in the
administration of the trusts or the performance of this Indenture the Trustee
shall deem it necessary or desirable that a matter be proved or established
prior to taking or suffering or omitting any action hereunder, such matter
(unless other evidence in respect thereof be herein specifically prescribed) may
be deemed to be conclusively proved and established by an Officers' Certificate,
and such certificate shall be full warrant of such action taken, suffered or
omitted by it under the provisions of this Indenture upon the faith thereof.
Section VIII.8. Moneys Received by Trustee to be Held in Trust.
-----
All moneys received by the Trustee shall, until used or applied as
herein provided, be held in trust for the purposes for which they were received,
but need not be segregated from other funds, except to the extent required by
law. The Trustee shall be under no liability for interest on any moneys received
by it hereunder.
Section VIII.9. Requirements for Eligibility of Trustee.
---------------------------------------
The Trustee hereunder shall at all times be a corporation organized
and doing business under the laws of the United States or any State or Territory
or of the District of Columbia authorized under such laws to exercise corporate
trust powers, having a combined capital and surplus of at least $1,000,000,
subject to supervision or examination by Federal, State, Territorial, or
District of Columbia authority. If such corporation publishes reports of
condition at least annually, pursuant to law or to the requirements of the
aforesaid supervising or examining authority, then for the purposes of this
Section, the combined capital and surplus of such corporation shall be deemed to
be its combined capital and surplus as set forth in its most recent report of
condition so published. In case at any time the Trustee shall cease to be
eligible
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in accordance with the provisions of this Section, the Trustee shall resign
immediately in the manner and with the effect specified in Section 8.10.
Section VIII.10. Resignation or Removal of Trustee.
---------------------------------
(a) The Trustee, or any successor hereafter appointed, may at
any time resign and be discharged from the trust hereby created by giving
written notice thereof to the Company. Upon receiving such notice of
resignation, the Company shall promptly seek to appoint a successor trustee by
written instrument, in duplicate, executed by order of the Board of Directors,
one copy of which instrument shall be delivered to the resigning Trustee and one
copy to the successor trustee. If no successor trustee shall have been so
appointed and have accepted appointment within 30 days after the giving of such
notice of resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor trustee, or any Holder of a
Debenture may, on behalf of himself and all others similarly situated, petition
any such court for the appointment of a successor trustee. Such court may
thereupon after such notice, if any, as it may deem proper and prescribe,
appoint a successor trustee.
(b) If any of the following shall occur at any time:
(i) the Trustee shall cease to be eligible in accordance with
the provisions of Section 8.9 and shall fail to resign after written
request therefor by the Company or by a Holder, or
(ii) the Trustee shall become incapable of acting, or shall be
adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its
property shall be appointed, or any public officer shall take charge or
control of the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation,
then, in any such case, the Company may remove the Trustee and appoint a
successor trustee by written instrument, in duplicate, executed by order of the
Board of Directors of the Company, one copy of which instrument shall be
delivered to the Trustee so removed and one copy to the successor trustee, or,
subject to the provisions of Section 7.12, a Holder may, on behalf of himself
and all others similarly situated, petition any court of competent jurisdiction
for the removal of the Trustee and the appointment of a successor trustee. Such
court may thereupon after such notice, if any, as it may deem proper and
prescribe, remove the Trustee and appoint a successor trustee.
(c) The Holders of a majority in aggregate principal amount of
Outstanding Debentures may at any time remove the Trustee and appoint a
successor trustee by written instrument or instruments, in triplicate, signed by
such Holders or their attorneys-in-fact duly authorized, one complete set of
which instruments shall be delivered to the Company, another to the Trustee so
removed and one complete set to the successor so appointed.
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(d) Any resignation or removal of the Trustee and any
appointment of a successor trustee pursuant to any of the provisions of this
Section shall become effective upon acceptance of appointment by the successor
trustee as provided in Section 8.11. Notwithstanding the foregoing, the
resignation of the Trustee shall in all events become effective 60 days after
written notice of such resignation has been given by the Trustee to the Company
pursuant to this Section 8.10.
(e) The Company shall give notice of each resig-nation and each
removal of the Trustee and each appointment of a successor trustee to the
Holders of the Debentures in the manner provided in Section 16.5. Each notice
shall include the name of each successor and the address of its corporate trust
office.
Section VIII.11. Acceptance by Successor Trustee.
-------------------------------
A successor Trustee appointed as provided in Section 8.10 shall
execute, acknowledge and deliver to the Company and to its predecessor trustee
an instrument accepting such appointment hereunder, and thereupon the
resignation or removal of the predecessor trustee shall become effective and
such successor Trustee, without any further act, deed or conveyance, shall
become fully vested with all the rights, powers, duties and obligations of its
predecessor hereunder, with like effect as if originally named as trustee
herein. The predecessor trustee shall, nevertheless, at the written request of
the Company or the successor Trustee, upon payment of any amount due it and then
unpaid, pay over to the successor Trustee all moneys at the time held by it
hereunder and the Company and the predecessor trustee shall execute and deliver
such instruments and take such other action as may reasonably be required for
more fully and certainly vesting and confirming in the successor trustee all
such rights, powers, duties and obligations.
No successor Trustee shall accept appointment as provided in this
Section unless, at the time of such acceptance, such successor Trustee shall be
eligible under the provisions of Section 8.9.
Section VIII.12. Successor to Trustee by Merger, Consolidation or
----------------
Succession to Business.
----------------------
Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any corporation resulting from any merger
or consolidation to which the Trustee shall be a party, or any corporation
succeeding to the business of the Trustee, shall be the successor of the Trustee
hereunder, provided such corporation shall be eligible under the provisions of
Section 8.9, without the execution or filing of any paper or any further act on
the part of any of the parties hereto, anything herein to the contrary
notwithstanding.
Section VIII.13. Authenticating Agent.
--------------------
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The Luxembourg Agent may authenticate the Global Debenture and the
Definitive Debentures, as the Trustee's
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Authenticating Agent. The Trustee may, with the consent of the Company, appoint
an additional Authenticating Agent or Agents acceptable to the Company with
respect to the Debentures to authenticate Debentures issued upon exchange or
substitution pursuant to this Indenture.
Debentures authenticated by an Authenticating Agent shall be entitled
to the benefits of this Indenture and shall be valid and obligatory for all
purposes as if authenticated by the Trustee hereunder, and every reference in
this Indenture to the authentication and delivery of Debentures by the Trustee
or the Trustee's certificate of authentication shall be deemed to include
authentication and delivery on behalf of the Trustee by an Authenticating Agent
and a certificate of authentication executed on behalf of the Trustee by an
Authenticating Agent. Each Authenticating Agent shall at all times be a
corporation organized and doing business under the laws of the United States of
America, any state thereof, the District of Columbia, England and Wales or
Luxembourg, authorized under such laws to act as Authenticating Agent and
subject to supervision or examination by government or other fiscal authority.
If at any time an Authenticating Agent shall cease to be eligible in accordance
with the provisions of this Section 8.13, such Authenticating Agent shall resign
immediately in the manner and with the effect specified in this Section 8.13.
Any corporation into which an Authenticating Agent may be merged or
converted or with which it may be consolidate, or any corporation resulting from
any merger, conversion or consolidation to which such Authenticating Agent shall
be a party, or any corporation succeeding to the corporate agency or corporate
trust business of an Authenticating Agent, shall continue to be an
Authenticating Agent, provided such corporation shall be otherwise eligible
under this Section 8.13, without the execution or filing of any paper or any
further act on the part of the Trustee or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written
notice thereof to the Trustee and to the Company. The Trustee may at any time
terminate the agency of an Authenticating Agent by giving written notice thereof
to such Authenticating Agent and to the Company. Upon receiving such notice of
resignation or upon such a termination, or in case at any time such
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section 8.13, the Trustee may appoint a successor
Authenticating Agent which shall be acceptable to the Company. Any successor
Authenticating Agent upon acceptance of its appointment hereunder shall become
vested with all the rights, powers and duties of its predecessor hereunder, with
like effect as if originally named as an Authenticating Agent. No successor
Authenticating Agent shall be appointed unless eligible under the provisions of
this Section 8.13.
The Company agrees to pay to each Authenticating Agent from time to
time reasonable compensation for its services under this Section 8.13. If an
Authenticating Agent is appointed with respect to the Debentures pursuant to
this Section 8.13, the Debentures may have endorsed thereon, in addition to or
in lieu of the Trustee's certification of authentication, an alternative
certificate of authentication in the following form:
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"This is one of the Debentures referred to in the within-mentioned
Indenture.
First Bank National Association,
doing business as
Colorado National Bank,
as Trustee
By [Authenticating Agent],
as Authenticating Agent
By: _________________________
Authorized Signatory"
ARTICLE IX
CONCERNING THE HOLDERS OF DEBENTURES
Section IX.1. Evidence of Action by Holders of Debentures.
----------
Any request, demand, authorization, direction, notice, consent, waiver
or other action provided or permitted by this Indenture to be given or taken by
Holders of Debentures may be embodied in and evidenced by (i) one or more
instruments of substantially similar tenor signed by such Holders in person or
by an agent or proxy duly appointed in writing by such Holders or (ii) the
record of Holders of Debentures voting in favor thereof, either in person or by
proxies duly appointed in writing, at any meeting of Holders of Debentures duly
called and held in accordance with the provisions of Article X. Except as herein
otherwise expressly provided, such action shall become effective when such
instrument or instruments or record is delivered to the Trustee and copies
thereof are delivered to the Company. The Trustee shall promptly deliver to the
Company copies of all such instruments and records delivered to the Trustee.
Proof of execution of any such instrument or of a writing appointing any such
agent or proxy, or the holding by any Person of a Debenture, shall be sufficient
for any purpose of this Indenture and (subject to Section 8.1) conclusive in
favor of the Trustee and the Company if made in the manner provided in this
Section. The record of any meeting of Holders of Debentures shall be proved in
the manner provided in Section 10.6.
Section IX.2. Proof of Execution of Instruments and of Holding of
----------
Debentures.
----------
(a) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgement of deeds, certifying that the individual signing
such instrument or writing acknowledged by him the execution thereof. Where such
execution is by a signer acting in a capacity other than his individual
capacity, such certificate or affidavit shall also constitute sufficient proof
of his authority. The
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fact and date of execution of any same may also be proved in any other manner
which the Trustee or the Paying Agent deems sufficient; and the Trustee or
Paying Agent may in any instance require further proof with respect to any of
the matters referred to in this Section 9.2.
(b) The principal amount and serial number of any Definitive
Debenture held by any Person, and the date of his holding the same, may be
proved by the production of such Definitive Debenture or by a certificate
executed by any trust company, bank, banker or other depositary, wherever
situated, if such certificate shall be deemed by the Trustee or the Paying Agent
to be satisfactory, showing that at the date therein mentioned such Person had
on deposit with such depositary, or exhibited to it, the Definitive Debenture
therein described; or such facts may be proved by the certificate or affidavit
of the Person holding such Definitive Debenture, if such certificate or
affidavit is deemed by the Trustee or the Paying Agent to be satisfactory. The
Trustee, the Paying Agent and the Company may assume that any Definitive
Debenture continued to be held by such Person until (1) another certificate or
affidavit bearing a later date issued in respect of such Definitive Debenture is
produced, or (2) such Definitive Debenture is produced to the Trustee or the
Paying Agent by some other Person, or (3) such Definitive Debenture is no longer
Outstanding. The principal amount and serial numbers of Definitive Debentures
held by the Person so executing such instrument or writing and the date of
holding the same may also be proved in any other manner which the Paying Agent
deems sufficient; and the Paying Agent may in any instance require further proof
with respect to any of the matters referred to in this Section 9.2.(b).
(c) Upon receipt by the Trustee or the Paying Agent from any Holder
of (i) any notice of Default or breach referred to in Section 7.1(c), if such
Default has occurred and is continuing and the Trustee shall not have given such
a notice to the Company, (ii) any declaration of acceleration referred to in
Section 7.2, if an Event of Default has occurred and is continuing and the
Trustee shall not have given such a declaration to the Company, or (iii) any
direction referred to in Section 7.10, if the Trustee shall not have taken the
action specified in such direction, then a record date shall automatically and
without any action by the Company or the Trustee be set for determining the
Holders entitled to join in such notice, declaration or direction, which record
date shall automatically and without any action by the Company or the Trustee be
set for determining the Holders entitled to join in such notice, declaration or
direction, which record date shall be the close of business on the 10th day (or,
if such day is not a Business Day, the first Business Day thereafter) following
the day on which the Trustee receives such notice, declaration or direction.
Promptly after such receipt by the Trustee, and as soon as practicable
thereafter, the Trustee shall notify the Company and the Holders of any such
record date so fixed. The Holders on such record date (or their duly appointed
agents or proxies), and only such Persons, shall be entitled to join in such
notice, declaration or direction, whether or not such Holders remain Holders
after such record date; provided that, unless such notice, declaration or
direction shall have become effective by virtue of Holders of the requisite
principal amount of Debentures on such record date (or their duly appointed
agents or proxies) having joined therein on or prior to the 90th day after such
record date, such notice, declaration or direction shall automatically and
without any action by any Person be cancelled and of no further effect. Nothing
in this paragraph shall be construed to prevent a Holder (or a duly
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appointed agent or proxy thereof) from giving, before or after the expiration of
such 90-day period, a notice, declaration or direction contrary to or different
from, or, after the expiration of such period, identical to, the notice,
declaration or direction to which such record date relates, in which event a new
record date in respect thereof shall be set pursuant to this paragraph. In
addition, nothing in this paragraph shall be construed to render ineffective any
notice, declaration or direction of the type referred to in this paragraph given
at any time to the Trustee and the Company by Holders (or their duly appointed
agents or proxies) of the requisite principal amount of Outstanding Debentures
on the date such notice, declaration or direction is so given.
(d) The provisions of this Section 9.2 are subject to the provisions
of Section 10.5.
Section IX.3. Action by Holder of Debenture Binds Future Holders.
--------------
Any request, demand, authorization, direction, notice, consent,
election, waiver or other action of the Holder of any Debenture shall be
conclusive and binding upon such Holder and upon all future Holders and owners
of such Debenture, and of any Debenture issued in exchange therefor or in place
thereof, irrespective of whether or not any notation in regard thereto is made
upon such Debenture. Any action taken by the Holders of the percentage in
aggregate principal amount of the Outstanding Debentures specified in this
Indenture in connection with such action shall be conclusively binding upon the
Company, the Trustee and the Holders of all the Debentures.
ARTICLE X
MEETINGS OF HOLDERS OF DEBENTURES
Section X.1. Purposes for Which Meetings May be Called.
------
A meeting of Holders of Debentures may be called at any time and from
time to time pursuant to the provisions of this Article X to make, give or take
any request, demand, authorization, direction, notice, consent, waiver or other
action authorized to be taken by the Holders of the Debentures or the Holders of
any specified aggregate principal amount of the Debentures under any provision
of this Indenture or as may be authorized or permitted by law.
Section X.2. Manner of Calling Meetings.
--------------------------
(a) The Trustee may at any time call a meeting of Holders of
Debentures for any purpose specified in Section 10.1, to be held at such time
and at such place in the Borough of Manhattan, City of New York, (or in the City
of London, England) as the Trustee shall determine. Notice of every meeting of
the Holders of Debentures, setting forth the time and the place of such meeting
and in general terms the action proposed to be taken at such meeting, shall be
given, in the manner provided in Section 16.5 by the Trustee, not less than 21
days nor more than 90 days prior to the date fixed for the meeting.
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(b) Any meeting of Holders of Debentures shall be valid without
notice if the Holders of all Debentures then outstanding are present in person
or by proxy, or if notice is waived before or after the meeting by the Holders
of all Debentures outstanding, and if the Company and the Trustee are either
present by duly authorized representatives or have, before or after the meeting,
waived notice.
Section X.3. Call of Meetings by Company or Holders of Debentures.
-------------
In case at any time the Company, pursuant to a Board Resolution, or
the Holders of at least 25% in principal amount of the Outstanding Debentures
shall have requested the Trustee to call a meeting for the Holders of
Debentures, by written request setting forth in reasonable detail the action
proposed to be taken at the meeting, and the Trustee shall not have made the
first publication of the notice of such meeting within 21 days after receipt of
such request, or shall not thereafter proceed to cause the meeting to be held as
provided herein, then the Company or the Holders of Debentures in the amount
specified, as the case may be, may determine the time and the place in the
Borough of Manhattan, City of New York, or in the City of London, England, for
such meeting and may call such meeting for such purposes by giving notice
thereof as provided in this Section 10.3.
Section X.4. Persons Entitled to Vote at Meetings.
------------------------------------
To be entitled to vote at any meeting of Holders of Debentures, a
Person shall (a) be a Holder of one or more Outstanding Debentures, or (b) be a
person appointed by a written instrument as proxy for a Holder or Holders of
Outstanding Debentures by such Holder or Holders. The only Persons who shall be
entitled to be present or to speak at any meeting of Holders of Debentures shall
be the Persons entitled to vote at such meeting and their counsel and any
representatives of the Trustee and any representatives of the Company and its
counsel.
Section X.5. Determination of Voting Rights, Control and Adjournment
---------------
of Meetings.
-----------
(a) Notwithstanding any other provision of this Indenture, the
Trustee may make such reasonable regulations as it may deem advisable for any
meeting of Holders of Debentures, in regard of proving the holding of Debentures
and of the appointment of proxies, and in regard of the appointment and duties
of inspectors of votes, and the submission and examination of proxies,
certificates and other evidence of the right to vote, and such other matters
concerning the conduct of the meeting as it shall think fit. Except as otherwise
permitted or required by any such regulations, the holding of Debentures and the
appointment of any proxy shall be proved in the manner specified in Section 9.2
or by having the signature of the Person executing the proxy witnessed or
guaranteed by any bank, banker or trust company deemed by the Trustee to be
satisfactory.
(b) The Trustee shall, by an instrument in writing, appoint a
temporary chairman of the meeting, unless the meeting shall have been called by
the Company or by
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Holders of Debentures as provided in Section 10.3, in which case the Company or
the Holders of Debentures calling the meeting, as the case may be, shall in like
manner, appoint a temporary chairman. A permanent chairman and a permanent
secretary of the meeting shall be elected by vote of the Holders of a majority
in aggregate principal amount of the Debentures represented at the meeting and
entitled to vote.
Subject to the provisions of Section 9.4 and 10.4, at any meeting each
Holder of Debentures or such Holder's proxy shall be entitled to one vote for
each U.S.$10,000 principal amount of Debentures; provided, however, that no vote
shall be cast or counted at any meeting in respect of any Debentures challenged
as not Outstanding and ruled by the chairman of the meeting to be not
Outstanding. The chairman of the meeting shall have no right to vote, except as
a Holder of Debentures or proxy. At any meeting of Holders of Debentures, the
presence (in person or by proxy) of Persons holding or representing Outstanding
Debentures in an aggregate principal amount sufficient to take action on the
business for the transaction of which such meeting was called shall constitute a
quorum. Any meeting of Holders of Debentures duly called pursuant to the
provisions of Sections 10.2 or 10.3 may be adjourned from time to time by the
vote of the Holders of a majority in aggregate principal amount of the
Outstanding Debentures represented at the meeting and entitled to vote, whether
or not constituting a quorum, and the meeting may be held as so adjourned
without further notice.
Section X.6. Manner of Voting at Meetings and Record to be Kept.
----------
The vote upon any resolution submitted to any meeting of Holders of
Debentures shall be by written ballots on which shall be subscribed the
signatures of the Holders of Debentures or of their representatives by proxy and
the principal amounts and serial numbers of the Debentures voted by the ballot.
The permanent chairman of the meeting shall appoint two inspectors of votes, who
shall count all votes cast at the meeting for or against any resolution and who
shall make and file with the secretary of the meeting their verified written
reports in duplicate of all votes cast at the meeting. A record, in duplicate,
of the proceedings of each meeting of the Holders of Debentures shall be
prepared by the secretary of the meeting and there shall be attached to said
record the original reports of the inspectors of votes on any vote by ballot
taken thereat and affidavits by one or more persons having knowledge of the
facts, setting forth a copy of the notice of the meeting and showing that notice
was given as provided in Section 10.2. The record shall be signed and verified
by the affidavits of the permanent chairman and secretary of the meeting and one
of the duplicates shall be delivered to the Company and the other to the Trustee
to be preserved by the Trustee, the latter to have attached thereto the ballots
voted at the meeting. Any record so signed and verified shall be conclusive
evidence of the matters therein stated.
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Section X.7. Exercise of Rights of Trustee or Holders of Debentures
May Not be Hindered or Delayed by Call of Meeting of
Holders of Debentures.
----------
Nothing in this Article X contained shall be deemed or construed to
authorize or permit, by reason of any call of a meeting of Holders of Debentures
or any rights expressly or impliedly conferred hereunder to make such call, any
hindrance or delay in the exercise of any right or rights conferred upon or
reserved to the Trustee or to the Holders of Debentures under any of the
provisions of this Indenture or of the Debentures.
ARTICLE XI
SUPPLEMENTAL INDENTURES
Section XI.1. Purposes for Which Supplemental Indentures May be
Entered into Without Consent of Holders of Debentures.
--------------------------------
The Company, when authorized by a Board Resolution, and the Trustee,
subject to the conditions and restrictions in this Indenture contained, may from
time to time and at any time enter into an indenture or indentures supplemental
hereto for one or more of the following purposes:
(a) to evidence the succession of another corporation to the
Company, or successive successions, and the assumption by the
successor corporation of the covenants, agreements and obligations of
the Company herein and in the Debentures and Coupons as permitted by
this Indenture;
(b) to add to the covenants of the Company in this Indenture, to
contain such further covenants and agreements thereafter to be
observed, or to surrender any right or power herein reserved to or
conferred upon the Company;
(c) to cure any ambiguity or to correct or supplement any
defective or inconsistent provision contained in this Indenture or in
any supplemental indenture; or to make such provisions with respect to
matters or questions arising under this Indenture as may be necessary
or desirable and not inconsistent with this Indenture; provided that
such action shall not adversely effect the interests of the Holders of
Debentures;
(d) to make provisions with respect to the conversion rights of
Holders of Debentures pursuant to the requirements of Section 5.10;
and
(e) to evidence and provide for the acceptance of appointment
hereunder of a successor Trustee.
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Upon Company Request, accompanied by a Board Resolution authorizing
the execution of any such supplemental indenture, and subject to and upon
receipt by the Trustee of the documents described in Section 11.3 hereof, the
Trustee shall join with the Company in the execution of any supplemental
indenture authorized or permitted by the terms of this Indenture and to make any
further appropriate agreements and stipulations which may be therein contained.
Any supplemental indenture authorized by the provisions of this
Section may be executed by the Company and the Trustee without the consent of
the Holders of any of the Debentures at the time outstanding, notwithstanding
any of the provisions of Section 11.2.
Section XI.2. Modification of Indenture with Consent of Holders of a
Majority in Principal Amount of Debentures.
--------------------
With the consent (evidenced as provided in Section 9.1) of the Holders
(or persons entitled to vote, or to give consents respecting the same) of not
less than a majority in aggregate principal amount of Outstanding Debentures,
the Company, when authorized by a Board Resolution, and the Trustee may, from
time to time and at any time, enter into an indenture or indentures supplemental
hereto for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of this Indenture or of any supplemental
indenture or of modifying in any manner the rights and obligations of the
Holders of the Debentures and of the Company; provided that, without the consent
of the Holders of all Outstanding Debentures and Coupons affected thereby, no
such supplemental indenture shall:
(a) change the maturity of the principal of, or any installment of
interest on, any Debenture, or reduce the principal amount or the rate of
interest payable thereon, or reduce the amount of principal that would be due
and payable upon a declaration of acceleration of the maturity thereof pursuant
to Section 7.2 or a redemption thereof pursuant to Article IV, or change the
obligation of the Company to pay Additional Amounts pursuant to Article VI, or
change the coin or currency in which any Debenture or the interest thereon or
any other amount in respect thereof is payable, or impair the right to institute
suit for the enforcement of any payment in respect of any Debenture on or after
the maturity thereof (or, in the case of redemption or any repurchase, on or
after the Redemption Date or Repurchase Date, as the case may be), or adversely
affect the right to convert any Debenture as provided in Article V, or
(b) reduce the requirements for quorum or voting, or reduce the
percentage in principal amount of the Outstanding Debentures the consent of
whose Holders is required for any such supplemental indenture or the consent of
whose Holders is required for any waiver provided for in this Indenture, or
(c) modify the obligation of the Company to maintain an office or
agency in London, England, and in a city in a Western European country (or
Luxembourg in particular if so required) pursuant to Section 6.2, or
(d) modify any of the provisions of this Section or Section 7.11,
except to increase any percentage contained herein or therein or to provide that
certain other provisions of
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this Indenture cannot be modified or waived without the consent of the Holder of
each Outstanding Debenture affected thereby; or
(e) modify any of the provisions of Section 6.17.
Upon Company Request, accompanied by a Board Resolution authorizing
the execution of any such supplemental indenture, and upon the filing with the
Trustee of evidence of the consent of Holders of Debentures as aforesaid, the
Trustee shall join with the Company in the execution of such supplemental
indenture unless such supplemental indenture affects the Trustee's own rights,
duties or immunities under this Indenture or otherwise, in which case the
Trustee may in its discretion, but shall not be obligated to, enter into such
supplemental indenture.
It shall not be necessary for the consent of the Holder of Debentures
under this Section to approve the particular form of any proposed supplemental
indenture, but it shall be sufficient if such consent shall approve the
substance thereof.
Section XI.3. Effect of Supplemental Indentures.
---------------------------------
Upon the execution of any supplemental indenture by the Company and
the Trustee pursuant to the provisions of this Article, or Article XII, this
Indenture shall be and be deemed to be modified and amended in accordance
therewith, and the respective rights, limitations of rights, obligations, duties
and immunities under this Indenture of the Trustee, the Company and the Holders
of Debentures shall thereafter be determined, exercised and enforced hereunder
subject in all respects to such modifications and amendments, and all the terms
and conditions of any such supplemental indenture shall be and be deemed to be
part of the terms and conditions of this Indenture for any and all purposes.
Section XI.4. Debentures May Bear Notation of Changes.
---------------------------------------
Debentures authenticated and delivered after the execution of any
supplemental indenture pursuant to the provisions of this Article or Article
XII, or after any action taken at a meeting of Holders of Debentures pursuant to
Article X, may bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture or as to any action taken at any
such meeting; and, in such case, suitable notation may be made upon outstanding
Debentures after proper presentation and demand. If the Company or the Trustee
shall so determine, new Debentures so modified as to conform, in the opinion of
the Trustee and the Board of Directors, to any modification of this Indenture
contained in any supplemental indenture, or to any action taken at any such
meeting, may be prepared by the Company, authenticated by the Trustee and
delivered in exchange for the Debentures then outstanding, upon demand of, and
without cost to, the Holders thereof upon surrender of such Debentures.
Section XI.5. Opinion of Counsel.
------------------
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The Trustee, subject to the provisions of Section 8.1, may require and
receive an Opinion of Counsel as conclusive evidence that any supplemental
indenture executed pursuant to this Article is authorized or permitted by the
terms of this Indenture and that it is not inconsistent therewith.
Section XI.6. Notice of Supplemental Indentures.
---------------------------------
Promptly after the execution by the Company and the Trustee of any
supplemental indenture pursuant to the provisions of Section 11.2, the Company
shall give notice to all Holders of Debentures of such fact, setting forth in
general terms the substance of such supplemental indenture, in the manner
provided in Section 16.5. Any failure of the Company to give notice, or any
defect therein, shall not in any way impair or affect the validity of any such
supplemental indenture.
Section XI.7. Consent of TCK.
--------------
The Company may not enter into any amendment of this Indenture without
the prior written consent of TCK, as long as (i) TCK owns at least 1,000,000
Shares, and (ii) either of Warrant A or Warrant B remains in effect.
ARTICLE XII
CONSOLIDATION OR MERGER
Section XII.1. When Company May Merge, Etc.
----------------------------
Notwithstanding the provisions of Section 6.10, the Company may
consolidate with, or merge with or into, another Person or transfer (by lease,
assignment, sale or otherwise) all or substantially all of its properties and
assets, in a single transaction, as an entirety or substantially as an entirety
to another Person if:
(a) either the Company shall be the continuing Person, or the Person
(if other than the Company) formed by such consolidation or into which the
Company is merged or to which the properties and assets of the Company as
an entirety or substantially as an entirety are transferred shall be a
Person organized and existing under the laws of the United States of
America or any state thereof or the District of Columbia and shall
expressly assume, by an indenture supplemental hereto, executed and
delivered to the Trustee, in form satisfactory to the Trustee, all the
obligations of the Company under the Debentures and this Indenture;
provided that a corporation at all times shall be a co-obligor together
with the continuing Person or transferee if the continuing Person or
transferee is itself not a corporation;
(b) prior to the consummation of such transaction, the Holders of a
majority in aggregate principal amount of the Outstanding Debentures shall
have consented to such transaction; provided, however, such consent shall
not be required i n
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connection with a transaction in which TCK or any Subsidiary thereof is the
surviving or acquiring entity;
(c) immediately before and immediately after giving effect to
such transaction, no Event of Default and no Default shall have occurred
and be continuing; and
(d) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, transfer or lease and such supplemental indenture
comply with this Article XII and that all conditions precedent herein
provided relating to such transaction have been complied with.
The foregoing shall not be applicable with respect to a consolidation,
merger or transfer that involves less than 25% of the assets of the Company.
Section XII.2. Successor Corporation.
---------------------
Upon any consolidation or merger, or any transfer of assets of the
Company in accordance with Section 12.1, the successor Person formed by such
consolidation or into which the Company is merged or to which such transfer is
made shall succeed to, and be substituted for, and may exercise every right and
power of, the Company under this Indenture with the same effect as if such
successor Person had been named as the Company herein. When a successor Person
assumes all of the obligations of the Company hereunder and under the
Debentures, the predecessor shall be released from such obligation.
ARTICLE XIII
SATISFACTION AND DISCHARGE OF INDENTURE;
DEPOSITED MONEYS
Section XIII.1. Satisfaction and Discharge of Indenture.
---------------------------------------
This Indenture shall, upon Company Request, cease to be of further
effect (except as to any surviving rights of conversion, exchange, or
replacement of Debentures herein expressly provided for and any right to receive
Additional Amounts as provided in the form of Definitive Debenture set forth in
Section 2.2(a) and the Company's obligations to the Trustee pursuant to Section
8.6, and the Trustee, at the expense of the Company, shall execute proper
instruments in form and substance satisfactory to the Trustee acknowledging
satisfaction and discharge of this Indenture, when
(a) either
(i) all Debentures theretofore authenticated and delivered and
all Coupons appertaining thereto (other than (1) Debentures and Coupons
which have been destroyed, lost or stolen and which have been replaced or
paid as provided in Section 3.7, (2)
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Coupons appertaining to Debentures called for redemption or repurchased and
maturing after the relevant Redemption Date or Repurchase Date, as the case may
be, whose surrender has been waived as provided in Section 4.6, and (3)
Debentures and Coupons for whose payment money had theretofore been deposited in
trust or segregated and held in trust by the Company and thereafter repaid to
the Company or discharged from such trust, as provided in Section 6.3 have been
delivered to the Trustee for cancellation; or
(ii) all such Debentures and all Coupons appertaining thereto
not theretofore delivered to the Trustee or the Paying Agent or its agent for
cancellation (other than Debentures or Coupons referred to in Section 13.1(a)(1)
through (3) above):
(1) have become due and payable; or
(2) have been called for redemption pursuant to Article IV,
or provision satisfactory to the Trustee shall have been made for the giving of
notice of redemption as provided in Article IV, and the Company shall have
deposited or caused to be deposited in trust with the Trustee or a Paying Agent
(other than the Company) funds (to be immediately available for payment) in an
amount sufficient to pay at maturity or upon redemption such Debentures and
Coupons not theretofore delivered to the Trustee for cancellation, including
principal, premium, if any, and interest due or to become due to the Maturity
Date or Redemption Date, as the case may be;
(3) the Company has paid or caused to be paid all other
sums payable thereunder by the Company; and
(4) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent herein provided for relating to the satisfaction and discharge of this
Indenture have been complied with.
(b) all obligations of the Company in respect of the Debentures shall
cease and be discharged, and the Holders of such Debentures shall thereafter be
restricted exclusively to such funds for any and all claims of whatsoever nature
on their part under this Indenture or with respect to such Debentures.
Notwithstanding the satisfaction and discharge of this Indenture, the
rights, remedies, immunities and defenses of the Trustee under this Indenture,
including but not limited to those contained in Section 8.1, with respect to
actions taken or omitted to be taken pursuant to this Indenture and events
occurring prior to such satisfaction and discharge, and the obligations of the
Company to the Trustee under Section 8.6, shall survive.
Section XIII.2. Application by Trustee of Funds Deposited for
-------------
Payment of Debentures.
---------------------
All moneys deposited with the Trustee pursuant to Section 13.1 shall
be held in trust and applied by it to the payment to the Holders of the
particular Debentures, for the
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payment or redemption of which such moneys have been deposited with the Trustee,
of all sums due and to become due thereon for principal, premium, if any, and
interest.
Section XIII.3. Repayment of Moneys Held by Paying Agent.
-----
In connection with the satisfaction and discharge of this Indenture
all moneys then held by any Paying Agent under the provisions of this Indenture
shall, upon demand of the Company or the Trustee, be paid to the Trustee and
thereupon such paying agent shall be released from all further liability with
respect to such moneys.
Section XIII.4. Moneys Deposited for Redemption of Debentures
Subsequently Converted to be Returned to Company.
-------------------
All moneys deposited with the Trustee or any Paying Agent for the
payment or redemption of Debentures subsequently converted shall be returned to
the Company upon its written request. All moneys deposited with any Conversion
Agent in connection with the Debentures surrendered for conversion for the
payment of interest on such Debentures on an Interest Payment Date shall be paid
over to the Company promptly after such Interest Payment Date.
Section XIII.5. Payment of Deposited Money to Company After Lapse of
--------------
Time.
----
In case the Holder of any Debenture entitled to payment hereunder at
any time outstanding hereunder shall not, within two years after the Maturity
Date, or if such Debenture shall have been called for redemption, then within
two years after the relevant Redemption Date, claim the amount on deposit with
the Trustee or other depositary for the payment of such Debenture, the Trustee
or other depositary shall pay over to the Company the amount so deposited, upon
Company Request, and thereupon the Trustee or other depositary shall be released
from any and all further liability with respect to the payment of such
Debenture, and the Holder of such Debenture as an unsecured creditor shall be
entitled (subject to any applicable statute of limitations) to look only to the
Company for the payment thereof.
ARTICLE XIV
IMMUNITY OF INCORPORATORS, STOCKHOLDERS,
OFFICERS AND DIRECTORS
Except for liabilities arising under the Securities Act, no recourse
shall be had for the payment of the principal of (and premium, if any) or the
interest on any Debenture or Coupon, or for any claim based thereon or otherwise
in respect thereof, and no recourse under or upon any obligation, covenant or
agreement of the Company in this Indenture or in any supplemental indenture, or
in any Debenture or Coupon, or because of the creation of any indebtedness
represented hereby shall be had against any incorporator, stockholder, officer,
trustee, director, past, present or future, as such of the Company or of any
predecessor or successor corporation, whether by virtue of any constitution,
statute or rule of law or equity, or
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by the enforcement of any assessment or penalty or otherwise; it being expressly
understood that all such liability is hereby expressly waived and released as a
condition of, and as a consideration for, the execution of this Indenture and
the issue of the Debentures.
ARTICLE XV
RIGHT TO REQUIRE REPURCHASE
Section XV.1. Right to Require Repurchase.
---------------------------
In the event of a Change of Control, then each Holder shall have
the right to require the Company to repurchase, and upon the exercise of such
right, the Company shall repurchase, all of such Holder's Debentures, or any
portion of the principal amount thereof that is an integral multiple of
U.S.$10,000 (provided that no single Debenture may be repurchased in part unless
the portion of the principal amount of such Debenture to be Outstanding after
such repurchase is equal to U.S.$10,000 or integral multiples of U.S.$10,000 in
excess thereof), on the date (the "Repurchase Date") that is 45 days after the
date of the Company Notice (as defined in Section 15.2) for cash in U.S. dollars
at a purchase price equal to 100% of the principal amount plus interest accrued
to the Repurchase Date (the "Repurchase Price"); provided, however, that
installments of interest on Debentures whose maturity is on or prior to the
Repurchase Date shall be payable only upon presentation and surrender of Coupons
for such interest (at an office or agency outside the United States, except as
otherwise provided in the form of Definitive Debenture set forth in Section
2.2(a)). Such right to require the repurchase of the Debentures shall not
continue after a discharge of the Company from its obligations with respect to
the Debentures in accordance with Article XIII, unless a Change of Control shall
have occurred prior to such discharge.
A "Change of Control" shall be deemed to have occurred at the time
when persons other than the Existing Control Group shall have become the
beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of
more than 50% of the aggregate Voting Stock of the Company.
Section XV.2. Notice; Method of Exercising Repurchase Right.
-----
(a) Unless the Company shall have theretofore called for
redemption all of the Outstanding Debentures, on or before the 30th day after
the occurrence of a Change of Control, the Company or, at the request of the
Company on or before the 15th day after such occurrence, the Trustee, shall give
to all Holders of Debentures, in the manner provided in Section 16.5 notice (the
"Company Notice"), of the occurrence of the Change of Control and of the
repurchase right set forth herein arising as a result thereof. The Company shall
also deliver a copy of such notice of a repurchase right to the Trustee.
Each notice of a repurchase right shall state:
(i) the Repurchase Date;
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(ii) the date by which the repurchase right must be exercised;
(iii) the Repurchase Price;
(iv) a description of the procedure which a Holder must follow to
exercise a repurchase right ;
(v) that on the Repurchase Date, the Repurchase Price will become
due and payable upon each such Debenture designated by the Holder to be
repurchased, and that interest on such Debenture shall cease to accrue on and
after said date;
(vi) the Conversion Price, the date on which the right to convert the
Debenture to be repurchased will terminate and the places where such Debentures,
together with all unmatured coupons and any matured Coupons in default
appertaining thereto, may be surrendered for conversion; and
(vii) the place or places where such Debentures, together with all
Coupons appertaining thereto, if any, maturing after the Repurchase Date, are to
be surrendered for payment of the Repurchase Price.
No failure of the Company to give the Company Notice or defect therein
shall limit any Holder's right to exercise a repurchase right or affect the
validity of the proceedings for the repurchase of Debentures.
(b) To exercise a repurchase right, a Holder shall deliver to any
Paying Agent on or before the 45th day after the date of the Company Notice, (i)
written notice of the Holder's exercise of such right, which notice shall set
forth the name of the Holder, the principal amount of the Debentures to be
repurchased and a statement that an election to exercise the repurchase right is
being made thereby, and (ii) the Debentures with respect to which the repurchase
right is being exercised, together with all Coupons, if any, appertaining
thereto maturing after the Repurchase Date; provided, however, the Debenture
shall be delivered only to the office of a Paying Agent located outside the
United States (except as otherwise provided in the form of Definitive Debenture
set forth in Section 2.2(a)). Such written notice shall be irrevocable, except
that the right of the Holder to convert the Debentures with respect to which the
repurchase right is being exercised shall continue until the close of business
on the Repurchase Date.
(c) In the event a repurchase right shall be exercised in accordance
with the terms hereof, the Company shall pay or cause to be paid to the Paying
Agent the Repurchase Price in cash, for payment to the Holder on the Repurchase
Date; provided, however, that the Repurchase Price shall be so payable only at
an office or agency outside the United States (except as otherwise provided in
the form of Definitive Debenture set forth in Section 2.2(a)).
(d) If any Debenture surrendered for repurchase shall not be
accompanied by all appurtenant Coupons maturing after the Repurchase Date, such
Debenture may be paid after
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deducting from the Repurchase Price an amount equal to the face amount of all
such missing Coupons, or the surrender of such missing Coupons may be waived by
the Company and the Trustee, if there be furnished to them such security or
indemnity as they may require to save each of them and any Paying Agent
harmless. If thereafter the Holder of such Debenture shall surrender to any
Paying Agent any such missing Coupon in respect of which a deduction shall have
been made from the Repurchase Price, such Holder shall be entitled to receive
the amount so deducted; provided, however, that interest represented by Coupons
shall be payable only upon presentation and surrender of those Coupons at an
office or agency located outside of the United States (except as otherwise
provided in the form of Definitive Security set forth in Section 2.2(a)).
(e) If any Debenture (or portion thereof) surrendered for repurchase
shall not be so paid on the Repurchase Date, the principal amount of such
Debenture (or portion thereof, as the case may be) shall, until paid, bear
interest from the Repurchase Date at the rate of 8% per annum, and each
Debenture shall remain convertible into Common Stock until the principal of such
Debenture (or portion thereof, as the case may be) shall have been paid or duly
provided for.
Section XV.3. Deposit of Repurchase Price.
---------------------------
Prior to the Repurchase Date, the Company shall deposit with the
Paying Agent an amount of money sufficient to pay the Repurchase Price of the
Debentures which are to be repaid on the Repurchase Date.
ARTICLE XVI
MISCELLANEOUS PROVISIONS
Section XVI.1. Successors and Assigns of Company Bound by Indenture.
------------
All the covenants and agreements by the Company in this Indenture
shall bind its successors and assigns, whether so expressed or not.
Section XVI.2. Acts of Board, Committee or Officer of Successor
---------
Corporation Valid.
-----------------
Any act or proceeding by any provision of this Indenture authorized or
required to be done or performed by any board, committee or officer of the
Company shall and may be done and performed with like force and effect by the
like board, committee or officer of any corporation that shall at the time be
the lawful successor of the Company.
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Section XVI.3. [Intentionally Omitted]
Section XVI.4. Notices, Etc. to Trustee and Company.
------------------------------------
Any request, demand, authorization, direction, notice, consent,
election, waiver or Act of Holders of Debentures or other document provided or
permitted by this Indenture to be made upon, given or furnished to, or filed
with,
(a) the Trustee, by any Holder of Debentures or by the Company,
shall be sufficient for every purpose hereunder if made, given, furnished,
or filed in writing to or with the Trustee at its Corporate Trust Office,
telecopier no.: 303-585-6865, Attention: Vice President-Corporate Trust; or
(b) the Company, by the Trustee or by any Holder of the
Debentures, shall be sufficient for every purpose hereunder (unless
otherwise herein expressly provided) if in writing, mailed, first-class
postage prepaid, or telecopied and confirmed by mail, first-class postage
prepaid, or delivered by hand or overnight courier, addressed to the
Company at Suite 3200, 1999 Broadway, Denver, Colorado 80202, telecopier
no.: 303-293-8430, Attention: Chief Financial Officer, or at any other
address previously furnished in writing to the Trustee by the Company.
Any request, demand, authorization, direction, notice, consent,
election or waiver required or permitted under this Indenture shall be in the
English language, except that any published notice (other than a notice
published in Luxembourg) may be in an official language of the country of
publication.
Section XVI.5. Notice to Holders of Debentures; Waiver.
---------------------------------------
Except as otherwise expressly provided herein, where this Indenture
provides for notice to Holders of Debentures of any event, such notice shall be
sufficiently given to Holders of Definitive Debentures or any Global Debenture
if published in an Authorized Newspaper in the City of London, England, and, so
long as the Debentures are listed on the Luxembourg Stock Exchange and the rules
of such stock exchange shall so require, in Luxembourg or, if not practicable in
either London, England or Luxembourg, elsewhere in any country in Western
Europe, on a Business Day at least twice, the first such publication to be not
earlier than the earliest date and the second such publication to be not later
than the latest date prescribed for the giving of such notice. Such notice shall
be deemed to have been given on the date of such publication or, if published in
Authorized Newspapers on different dates, on the date of the first such
publication. In case by reason of the suspension of publication of any
Authorized Newspaper or by reason of any other cause it shall be impracticable
to publish any notice as provided above, then such notification as shall be
given with the approval of the Trustee, which approval shall not be unreasonably
withheld, shall constitute sufficient notice to such Holders for every purpose
hereunder.
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Where this Indenture provides for notice in any manner, such notice
may be waived in writing by the Person entitled to receive such notice, either
before or after the event, and such waiver shall be the equivalent of such
notice. Waivers of notice by Holders of Debentures shall be filed with the
Trustee, but such filing shall not be a condition precedent to the validity of
any action taken in reliance upon such waiver.
Section XVI.6. Effect of Headings and Table of Contents.
--------
The Article and Section headings herein and the Table of Contents are
for convenience only and shall not affect the construction hereof.
Section XVI.7. Indenture and Debentures to be Construed in Accordance
with Laws of State of New York.
----
This Indenture, each Debenture and each Coupon shall be deemed to be a
contract made under the laws of the State of New York, and for all purposes
shall be governed by and construed in accordance with the internal substantive
laws of such State without giving effect to the choice of law rules thereof.
Section XVI.8. Officers' Certificate and Opinion of Counsel to be
Furnished upon Applications or Demands by Company.
----------------------------------
Upon any Company Request or application by the Company to the Trustee
or the Paying Agent to take any action under any provision of this Indenture,
the Company shall furnish to the Trustee or the Paying Agent, as the case may
be, an Officers' Certificate stating that all conditions precedent, if any,
provided for in this Indenture relating to the proposed action have been
complied with and an Opinion of Counsel stating that in the opinion of such
counsel all such conditions precedent, if any, have been complied with, and such
action or omission does not violate the terms of this Indenture or the
provisions of any applicable law, except that in the case of any such
application or request as to which the furnishing of such documents is
specifically required by any provision of this Indenture relating to such
particular application or request, no additional certificate or opinion need be
furnished.
Each certificate or opinion provided for in this Indenture and
delivered to the Trustee with respect to compliance with a condition or covenant
provided for in this Indenture shall include: (1) a statement that the person
making such certificate or opinion has read such covenant or condition; (2) a
brief statement as to the nature and scope of the examination or investigation
upon which the statements or opinions contained in such certificate or opinion
are based; (3) a statement that, in the opinion of such person, he has made such
examination or investigation as is necessary to enable him to express an
informed opinion as to whether or not such covenant or condition has been
complied with; and (4) a statement as to whether or not, in the opinion of such
person, such condition or covenant has been complied with.
Any certificate, statement or opinion of an officer of the Company may
be based, insofar as it relates to legal matters, upon a certificate, an opinion
of or representations by
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counsel, unless such officer knows, or in the exercise of his reasonable care
shall know, that the certificate or opinion or representations with respect to
the matters upon which his certificate, statement or opinion may be based as
aforesaid are erroneous. Any certificate, statement or Opinion of Counsel may be
based (insofar as it relates to factual matters, information with respect to
which is in the possession of the Company) upon the certificate, statement or
opinion of or representations by any officer or officers of the Company with
direct knowledge of such factual matters, unless such counsel knows or in the
exercise of reasonable care should know, that the certificate, statement or
opinion or representations with respect to the matters upon which his
certificate, statement or opinion may be based as aforesaid are erroneous.
Any certificate, statement or opinion of an officer of the Company or
of counsel may be based, insofar as it relates to accounting matters, upon a
certificate or opinion of or representations by an accountant or firm of
accountants, unless such officer or counsel, as the case may be, knows, or in
the exercise of reasonable care should know, that the certificate or opinion or
representations with respect to the accounting matters upon which his
certificate, statement or opinion may be based as aforesaid are erroneous.
Section XVI.9. Benefits of Indenture.
---------------------
Nothing in this Indenture or in the Debentures or Coupons, express or
implied, shall give to any Person, other than the parties hereto and their
successors and assigns hereunder and the holders of Debentures and Coupons, any
benefit or legal or equitable right, remedy or claim under this Indenture.
Section XVI.10. Legal Holidays.
--------------
In any case where any Interest Payment Date, Redemption Date,
Repurchase Date or the maturity date of any Debenture or Coupon or the last day
on which a Holder of a Debenture has a right to convert his Debenture shall not
be a Business Day at the place of payment or place of conversion, as the case
may be, then (notwithstanding any other provision of this Indenture or of the
Debentures or Coupons), payment of interest, or principal premium, if any, or
delivery for conversion of such Debenture need not be made at such place of
payment or place of conversion, as the case may be, on or by such day, but may
be made on or by the next succeeding Business Day at such place of payment or
place of conversion, as the case may be, with the same force and effect as if
made on the Interest Payment Date, Redemption Date or Repurchase Date, or the
maturity date or by such last day for conversion; provided, however, that in
case that payment is made on such succeeding Business Day, no interest shall
accrue on the amount so payable for the period from and after such Interest
Payment Date, Redemption Date, Repurchase Date, Stated Maturity or last day for
conversion, as the case may be.
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Section XVI.11. Effect of Invalidity of Provisions.
----------------------------------
In case any one or more of the provisions contained in this Indenture,
in the Debentures or the Coupons shall for any reason be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provisions of this Indenture, of
such Debentures or of such Coupons, but this Indenture, such Debentures and such
Coupons shall be construed as if such invalid or illegal or unenforceable
provision had never been contained herein or therein.
Section XVI.12. Execution in Counterparts.
-------------------------
This Indenture may be executed in any number of counterparts, each of
which shall be an original; but all such counterparts shall together constitute
but one and the same instrument.
Colorado National Bank, the party of the second part, hereby accepts
the trusts in this Indenture declared and provided, upon the terms and
conditions hereinabove set forth.
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IN WITNESS WHEREOF, KFx Inc., the party of the first part, has caused
this Indenture to be signed in its corporate name and acknowledged by Jeffrey
Hansen, its Chief Financial Officer, and its corporate seal to be affixed
hereunto; and First Bank National Association, doing business as Colorado
National Bank, the party of the second part, has caused this Indenture to be
signed and acknowledged by a Vice President thereof and its corporate seal to be
affixed hereunto, all as of the day and year first above written.
[Seal]
KFx INC.
Attest:
By:________________________________
Name:
______________________ Title:
FIRST BANK NATIONAL ASSOCIATION,
doing business as
[Seal] COLORADO NATIONAL BANK
By:________________________________
Name: Adam Dalmy
Attest: Title: Vice President *
Corporate Trust
______________________
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STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On July 25, 1997, before me personally came Jeffrey Hansen to me
known, who, being by me duly sworn, did depose and say that he resides at
_____________________________________, Colorado, that he is the Chief Financial
Officer of KFx Inc., one of the corporations described in and which executed the
foregoing Indenture; that he knows the seal of said corporation; that the seal
affixed to said Indenture is such corporate seal; that it was so affixed and
that he signed his name thereto by order of the board of directors of said
corporation and that he signed his name thereto by like order.
(Seal) _______________________________
Notary Public
STATE OF COLORADO )
: ss.:
COUNTY OF )
The foregoing instrument was acknowledged before me this ___ day of
______ 1997 by _________, Vice President-Corporate Trust of First Bank National
Association, doing business as Colorado National Bank. Witness my hand and
official seal.
_____________________________
(Title of Officer)
My commission expires _______
________________________________
Notary Public
(Seal)
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EXHIBIT 10.41
________________________________________________________________________________
PURCHASE AGREEMENT
AMONG
KFX INC., ("BUYER")
AND
PEGASUS TECHNOLOGIES, LTD.,
AND
THE LUCIER GROUP AND THE RADL GROUP
("SELLERS")
------------------------------
DATED AS OF MARCH 23, 1998
------------------------------
________________________________________________________________________________
<PAGE>
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TABLE OF CONTENTS
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Page
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ARTICLE I DEFINITIONS
ARTICLE II PURCHASE AND SALE OF THE PERCENTAGE INTERESTS
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Section 2.01. PURCHASE AND SALE....................................... 4
Section 2.02. PURCHASE PRICE.......................................... 4
Section 2.03. METHOD OF PAYMENT....................................... 4
Section 2.04. ADDITIONAL CONSIDERATION................................ 4
Section 2.05. CLOSING................................................. 4
Section 2.06. CLOSING DELIVERIES...................................... 5
Section 2.07. FURTHER ASSURANCES...................................... 6
Section 2.08. CONSUMMATION OF CLOSING................................. 6
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE SELLING HOLDERS
Section 3.01. ORGANIZATION EXISTENCE AND POWER........................ 6
Section 3.02. AUTHORIZATION........................................... 7
Section 3.03. GOVERNMENTAL AUTHORIZATION.............................. 7
Section 3.04. EFFECT OF AGREEMENT ON THE COMPANY...................... 7
Section 3.05. CAPITALIZATION.......................................... 7
Section 3.06. SUBSIDIARIES............................................ 8
Section 3.07. FINANCIAL STATEMENTS.................................... 8
Section 3.08. ABSENCE OF CERTAIN CHANGES.............................. 8
Section 3.09. NO UNDISCLOSED LIABILITIES.............................. 9
Section 3.10. RELATED PARTY TRANSACTIONS.............................. 9
Section 3.11. MATERIAL CONTRACTS...................................... 9
Section 3.12. LITIGATION.............................................. 11
Section 3.13. COMPLIANCE WITH LAWS AND COURT ORDERS; NO DEFAULTS...... 11
Section 3.14. PROPERTIES.............................................. 11
Section 3.15. PRODUCTS................................................ 12
Section 3.16. INTELLECTUAL PROPERTY................................... 13
Section 3.17. INSURANCE COVERAGE...................................... 15
Section 3.18. LICENSES AND PERMITS.................................... 15
Section 3.19. INVENTORIES............................................. 15
Section 3.20. LOANS, NOTES, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE.. 15
Section 3.21. PROJECTIONS............................................. 15
Section 3.22. FINDERS' FEES........................................... 16
Section 3.23. EMPLOYEES............................................... 16
Section 3.24. LABOR MATTERS........................................... 16
Section 3.25. ENVIRONMENTAL MATTERS................................... 16
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Section 3.26. FULL DISCLOSURE......................................... 16
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE SELLING HOLDERS
Section 4.01. TITLE TO PERCENTAGE INTERESTS........................... 16
Section 4.02. EFFECT OF AGREEMENT ON SELLING HOLDERS.................. 17
Section 4.03. LITIGATION.............................................. 17
Section 4.04. SELLING HOLDER AGREEMENTS............................... 17
Section 4.05. FULL DISCLOSURE......................................... 17
ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER
Section 5.01. CORPORATE EXISTENCE AND POWER........................... 18
Section 5.02. CORPORATE AUTHORIZATION................................. 18
Section 5.03. GOVERNMENTAL AUTHORIZATION.............................. 18
Section 5.04. NON-CONTRAVENTION....................................... 18
Section 5.05. FINDERS' FEES........................................... 18
ARTICLE VI COVENANTS OF THE PARTIES
Section 6.01. BEST EFFORTS............................................ 19
Section 6.02. CERTAIN FILINGS......................................... 19
Section 6.03. NONCOMPETITION; NONSOLICITATION......................... 19
Section 6.04. CONFIDENTIALITY......................................... 20
ARTICLE VII TAX REPRESENTATIONS AND COVENANTS
Section 7.01. TAX DEFINITIONS......................................... 20
Section 7.02. TAX REPRESENTATIONS AND COVENANTS....................... 21
ARTICLE VIII EMPLOYEE BENEFITS
Section 8.01. EMPLOYEE BENEFITS DEFINITIONS........................... 23
Section 8.02. EMPLOYEE PLANS.......................................... 23
Section 8.03. BENEFIT ARRANGEMENTS.................................... 23
Section 8.04. NO THIRD-PARTY BENEFICIARIES............................ 23
ARTICLE IX CONDITIONS TO CLOSING
Section 9.01. CONDITIONS TO OBLIGATIONS OF THE PARTIES................ 24
Section 9.02. CONDITIONS TO OBLIGATION OF BUYER....................... 24
Section 9.03. CONDITIONS TO OBLIGATION OF THE COMPANY AND THE SELLING
HOLDERS................................................. 25
ARTICLE X CREDIT ACCOMMODATIONS
Section 10.01. WORKING CAPITAL LINE................................... 25
Section 10.02. FORM OF ADVANCES....................................... 25
Section 10.03. CONDITIONS TO ADVANCES................................. 26
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Section 10.04. COVENANTS OF COMPANY................................... 26
Section 10.05. TERM OF OBLIGATION..................................... 26
Section 10.06. ADVANCES SUBJECT TO SETOFF............................. 26
ARTICLE XI SURVIVAL; INDEMNIFICATION
Section 11.01. SURVIVAL............................................... 27
Section 11.02. INDEMNIFICATION OBLIGATIONS............................ 27
Section 11.03. METHOD OF ASSERTING CLAIMS, ETC........................ 28
Section 11.04. PAYMENT................................................ 30
Section 11.05. SERVICE OF PROCESS..................................... 30
Section 11.06. EQUITABLE RELIEF....................................... 31
ARTICLE XII MISCELLANEOUS
Section 12.01. RELEASE OF THE COMPANY/SELLING HOLDERS................. 31
Section 12.02. NOTICES................................................ 32
Section 12.03. AMENDMENTS AND WAIVERS................................. 33
Section 12.04. EXPENSES............................................... 33
Section 12.05. SUCCESSORS AND ASSIGNS................................. 33
Section 12.06. GOVERNING LAW.......................................... 33
Section 12.07. ENTIRE AGREEMENT....................................... 33
Section 12.08. SPECIFIC PERFORMANCE................................... 33
Section 12.09. RELIANCE............................................... 33
Section 12.10. INTERPRETATION......................................... 34
Section 12.11. COUNTERPARTS; THIRD PARTY BENEFICIARIES................ 34
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Appendix A: Percentage Interest Holders
Appendix B: Payment of Cash Consideration
Exhibit A: Form of Notes
Exhibit B: Administrative Services Agreement
Exhibit C: Form of Amended and Restated Operating Agreement
Exhibit D: Form of Transfer and Assignment Agreement
Exhibit E: Form of Opinion of Mandel Lipton and Stevenson Limited
Exhibit F: Form of Manager's Certificate
Exhibit G: Employment Agreements of Messrs. Radl, Weintz and Roland
Exhibit H: Form of Proprietary Information and Invention Agreements
Exhibit I: Form of Master Note
Exhibit J: Form of Security Agreement
Schedule 3.03: Governmental Authorization
Schedule 3.04: Exceptions to Validity of Agreement
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Schedule 3.05: Capitalization
Schedule 3.06: Subsidiaries
Schedule 3.08: Certain Changes
Schedule 3.09: Undisclosed Liabilities
Schedule 3.10: Related Party Transactions
Schedule 3.11: Material Contracts
Schedule 3.12: Litigation
Schedule 3.14: Properties
Schedule 3.15: Proprietary Software
Schedule 3.16: Intellectual Property
Schedule 3.17: Exceptions to Insurance Coverage
Schedule 3.18: Licenses and Permits
Schedule 3.23: Employees
Schedule 3.25: Environmental Matters
Schedule 4.04: Exception to Selling Holder Agreements
Schedule 7.02: Exceptions to Tax Warranties
Schedule 8.02: Employee Benefit Plans
Schedule 8.03: Benefit Arrangements
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EXHIBIT 10.39
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT (this "Agreement") dated as of March 23, 1998, is
entered into among KFx Inc. a Delaware corporation ("Buyer"), Pegasus
Technologies, Ltd., an Ohio limited liability company (the "Company"), P.
Jeffrey Lucier, Craig W. Fraser and Alfred R. Lipton (collectively, the "Lucier
Group"), and Brad J. Radl, Philip A. Weintz, Willie B. Roland, Jr., Terry V.
Radl and Richard W. Vesel (collectively, the "Radl Group"). The Lucier Group and
the Radl Group are sometimes collectively referred to herein as the "Selling
Holders" and individually as a "Selling Holder."
W I T N E S S E T H :
WHEREAS, the Selling Holders own an aggregate 85% Percentage Interest (as
defined below) in the Company, with each Selling Holder owning that Percentage
Interest set forth opposite such Selling Holder's name in column B of Appendix
A; and
WHEREAS, Buyer is willing to buy and the Selling Holders are willing to sell
the Percentage Interests set forth opposite such Selling Holder's name in column
C of Appendix A (the "Purchased Interests") on the terms and conditions and in
reliance on the representations and warranties set forth herein.
NOW, THEREFORE, for and in consideration of the premises and the mutual
convenants and agreements hereinafter set forth, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS
The following terms, as used herein, have the following meanings:
"Affiliate" means, with respect to any Person, any other Person directly or
indirectly controlling, controlled by, or under common control with such Person.
"Balance Sheet" means the balance sheet of the Company as of December 31,
1997.
"Balance Sheet Date" means December 31, 1997.
"Closing Date" means the date of the Closing.
"Company Note" means that certain promissory note dated February 4, 1998
among Buyer, as payee, and the Company and Messrs. Lucier and Radl, as makers,
in the aggregate principal amount of $300,000.
"Confidential Information" means any information relating to the properties,
prospects, products, services or operations of the Company or any direct or
indirect Affiliate thereof that is not generally known, is proprietary to the
Company or such Affiliate and is made known to such Person
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or learned or acquired by such Person while such Person was a Member, Manager,
employee or independent contractor of the Company, including, without
limitation, information relating to the software developed by the Company,
information as to sources of, and arrangements for, hardware supplied to
customers or clients of the Company, submission and proposal procedures of the
Company, customer or contact lists, information concerning trade secrets of the
Company, or any of the Company's Affiliates and any improvements relating to the
products of the Company in accounting, marketing, selling, leasing, financing
and other business methods and techniques.
However, Confidential Information shall not include (i) at the time of
disclosure to any Person such information that was in the public domain or later
entered the public domain other than as a result of a breach of an obligation
herein; or (ii) subsequent to disclosure to any Person, such Person received
such information from a third party under no obligation to maintain such
information in confidence, and the third party came into possession of such
information other than as a result of a breach of an obligation herein.
"Environmental Laws" means any and all federal, state, local and foreign
statutes, laws, judicial decisions, regulations, ordinances, rules, judgments,
orders, decrees, codes, plans, injunctions, permits, concessions, grants,
franchises, licenses, agreements and governmental restrictions, now in effect,
relating to human health, the environment or to emissions, discharges or
releases of pollutants, contaminants, Hazardous Substances or wastes into the
environment, including without limitation ambient air, surface water, ground
water or land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants, Hazardous Substances or wastes or the clean-up or
other remediation thereof.
"Environmental Liabilities" means any and all liabilities of or relating to
the Company (including any entity which is, in whole or in part, a predecessor
of the Company), whether vested or unvested, contingent or fixed, actual or
potential, known or unknown, which (a) arise under or relate to matters covered
by Environmental Laws (including without limitation any matters disclosed or
required to be disclosed in Schedule 3.25 hereto), and (b) relate to actions
occurring or conditions existing on or prior to the Closing Date.
"Environmental Permits" means all permits, licenses, authorizations,
certificates and approvals of governmental authorities relating to or required
by Environmental Laws and necessary or proper for the business of the Company as
currently conducted.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, together with all regulations promulgated thereunder.
"GAAP" means generally accepted accounting principles, consistently applied.
"Hazardous Substances" means any toxic, radioactive, corrosive or otherwise
hazardous substance, including petroleum, its derivatives, by-products and other
hydrocarbons, or any substance having any constituent elements displaying any of
the foregoing characteristics, including, without limitation, any substance
regulated under Environmental Laws.
"Immediate Family Member" means, with respect to any Person, such Person's
spouse, parents, children and siblings.
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"Intellectual Property Right" means any trademark, service mark, trade name
and patent (including any registrations or applications for registration of any
of the foregoing).
"Lien" means, with respect to any property or asset, any mortgage, lien,
pledge, charge, security interest, encumbrance or other adverse claim of any
kind in respect of such property or asset. For the purposes of this Agreement, a
Person shall be deemed to own subject to a Lien any property or asset which it
has acquired or holds subject to the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement
relating to such property or asset.
"Manager" shall have the meaning assigned to such term in the Operating
Agreement.
"Material Adverse Effect" means an effect or occurrence that would reasonably
be expected to have a material adverse effect on the condition (financial or
otherwise), business, assets or results of operations of the Company, taken as
whole.
"Member" shall have the meaning assigned to such term in the Operating
Agreement and shall include, for purposes of this Agreement, a Person who owns
an Economic Interest (as defined in the Operating Agreement) in the Company.
"NeuSight Software" means the Company's process monitoring and optimization
software program for application in the utilities industry, including all
subsequent upgrades, modifications, enhancements and releases thereof.
"1933 Act" means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
"1934 Act" means the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.
"Operating Agreement" means the Operating Agreement dated August 16, 1996
entered into by and among the Company, the Selling Holders and AIW/P Holdings,
Inc.
"Person" means an individual, corporation, partnership, association, trust or
other entity or organization, including a government or political subdivision or
an agency or instrumentality thereof.
"Percentage Interest" shall have the meaning assigned to such term in the
Operating Agreement and shall include "Membership Interests" as defined in the
Operating Agreement.
"Purchased Interest" shall mean the Percentage Interests set forth opposite
such Selling Holder's name in column C of Appendix A.
"Subsidiary" means any entity of which securities or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions are at the time directly
or indirectly owned by the Company.
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"Transaction Documents" means this Agreement and any other document
contemplated hereby or thereby, including, without limitation, the Letter of
Intent dated February 2, 1998, by and among Buyer, the Company and the Selling
Holders.
ARTICLE II
PURCHASE AND SALE OF THE PERCENTAGE INTERESTS
Section 2.01. PURCHASE AND SALE. Upon the basis of the representations and
warranties herein contained and on the terms and subject to the conditions of
this Agreement, the Selling Holders agree to sell, convey, transfer, assign and
deliver the Purchased Interests to Buyer at the Closing, free and clear of all
Liens, covenants, conditions or restrictions of any kind or nature whatsoever,
and Buyer agrees to purchase and accept the Purchased Interests from the Selling
Holders at Closing.
Section 2.02. PURCHASE PRICE. The aggregate purchase price (the "Purchase
Price") for the Purchased Interests shall be $2,200,000, less the outstanding
principal and interest on the Company Note.
Section 2.03. METHOD OF PAYMENT. The Purchase Price shall be payable by
Buyer as follows:
(a) $1,100,000 (the "Cash Consideration") payable to the Selling
Holders in the amounts set forth in Appendix B to this Agreement;
(b) $600,000 payable in the form of promissory notes (the "Notes"), in
the following aggregate principal amounts: $360,000 to P. Jeffrey Lucier,
$180,000 to Craig W. Fraser and $60,000 to Alfred R. Lipton in the forms
attached hereto as Exhibit A; and
(c) $500,000 payable to the Company less the outstanding principal
amount of the Company Note and any accrued interest due thereon.
Section 2.04. ADDITIONAL CONSIDERATION. As additional consideration to
the Company and the Selling Holders, Buyer shall provide the Company with a line
of credit in the amount of $1,400,000 (the "Working Capital Line") in accordance
with the terms and conditions set forth in Article X of this Agreement.
Section 2.05. CLOSING. The closing (the "Closing") of the purchase and
sale of the Purchased Interests hereunder shall take place at the offices of
Morrison & Foerster, 370 Seventeenth Street, Suite 5200, Denver, Colorado 80202,
concurrently with the execution of this Agreement, or at such other time and
place as the parties shall mutually agree.
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Section 2.06. CLOSING DELIVERIES. At the Closing:
(a) Buyer shall deliver to the Company and the Selling Holders, as the
case may be:
(i) The Cash Consideration as set forth in Sections 2.03(a) and
(c) in immediately available funds by wire transfer to an account of
each Selling Holder and the Company as specified in the notice to
Buyer, given not later than two business days prior to the Closing
Date, or, if not so designated, then by certified or official bank
check payable in immediately available funds to the order of the
Company and the Selling Holders, as the case may be;
(ii) The Notes, duly executed by Buyer;
(iii) The Administrative Services Agreement, duly executed by
Buyer, in the form attached hereto as Exhibit B;
(iv) The Amended and Restated Operating Agreement, duly executed
by Buyer in the form attached hereto as Exhibit C; and
(v) The original Company Note, marked cancelled.
(b) Each Selling Holder shall deliver to Buyer:
(i) a duly executed Transfer and Assignment Agreement in the
form attached hereto as Exhibit D; and
(ii) Amended and Restated Operating Agreement executed by all
remaining Members of the Company.
(c) The Company shall deliver to Buyer the following:
(i) An opinion of Mandel, Lipton and Stevenson Limited, counsel
to the Company, dated as of the Closing Date, substantially identical
in form and substance to Exhibit E attached hereto;
(ii) All consents, authorizations or approvals from the
governmental agencies referred to in Section 3.03, if any, in each
case in form and substance reasonably satisfactory to Buyer, and no
such consent, authorization or approval shall have been revoked;
(iii) A Manager's Certificate, in the form attached hereto as
Exhibit F;
(iv) Executed employment agreements for Messrs. Radl, Weintz and
Roland in the forms attached hereto as Exhibit G;
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(v) Executed Proprietary Information and Invention Agreements,
in the form attached hereto as Exhibit H, for those persons set forth
on Schedule 3.23 of this Agreement;
(vi) The Administrative Services Agreement, duly executed by the
Company; and
(vii) The Master Note and the Security Agreement, duly executed
by the Company in the forms attached hereto as Exhibits I and J,
respectively.
The parties shall deliver such further documents, resolutions, certificates
and instruments as any party or his, her or its counsel reasonably requests to
facilitate the consummation of the transactions contemplated hereby.
Section 2.07. FURTHER ASSURANCES. At any time and from time to time after
the Closing Date, at the request of the Buyer and without further consideration,
each Seller (and, as and to the extent necessary or appropriate, the Company or
its officers will execute and deliver such other instruments of sale, transfer,
conveyance, assignment and confirmation as may be reasonably requested in order
to more effectively transfer, convey and assign to the Buyer and to confirm the
Buyer's title to the Percentage Interest.
Section 2.08. CONSUMMATION OF CLOSING. All acts, deliveries and
confirmations comprising the Closing regardless of chronological sequence shall
be deemed to occur contemporaneously and simultaneously upon the occurrence of
the last act, delivery or confirmation of the Closing and none of such acts,
deliveries, or confirmations shall be effective unless and until the last of the
same shall have occurred.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE SELLING HOLDERS
The Company and each Selling Holder (except for Mr. Richard W. Vesel, and
with respect to Sections 3.15, 3.20 and 3.21 except for the Lucier Group, and
with respect to Section 3.11 except for Craig W. Fraser and Alfred R. Lipton)
jointly and severally represent and warrant to Buyer as of the date hereof as
follows:
Section 3.01. ORGANIZATION EXISTENCE AND POWER. The Company is a limited
liability company duly organized, validly existing and in good standing under
the laws of its jurisdiction of organization and has all powers and all
governmental licenses, authorizations, permits, consents and approvals required
to carry on its business as now conducted. The Company is duly qualified to do
business as a foreign limited liability company, where required, and is in good
standing in each jurisdiction where such qualification is necessary, except for
those jurisdictions where failure to be so qualified, individually or in the
aggregate, would not have a Material Adverse Effect. The Company has delivered
to Buyer true and complete copies of its Certificate of Organization and
Operating Agreements currently in effect.
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Section 3.02. AUTHORIZATION. The execution, delivery and performance by
the Company of this Agreement and the other Transaction Documents to which it is
a party are within the Company's powers, and this Agreement and the other
Transaction Documents have been duly authorized by all necessary action on the
part of the Company.
Section 3.03. GOVERNMENTAL AUTHORIZATION. Except as set forth in Schedule
3.03, the execution, delivery and performance by the Company of this Agreement
requires no action by or in respect of, or filing with, any governmental body,
agency, or official.
Section 3.04. EFFECT OF AGREEMENT ON THE COMPANY. Except as set forth in
Schedule 3.04, neither the execution and delivery of this Agreement, the
Transaction Documents to which it is a party nor the consummation of the
transactions contemplated hereby or thereby will (i) result in the acceleration
or termination of, or the creation in any party of the right to accelerate,
terminate, modify or cancel, any contract or other obligation or liability to
which the Company is a party or is bound or to which the Company's assets are
subject, (ii) conflict with, violate or result in a breach of any provision of
its Articles of Organization or Operating Agreement, or (iii) conflict with or
violate any law, rule, regulation, ordinance, order, writ, injunction or decree
applicable to the Company or by which any of its respective properties or assets
is bound or affected. This Agreement has been duly executed and delivered by the
Company and (assuming that it has been duly executed and delivered by Buyer),
constitutes a legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms except as enforcement thereof
may be limited by liquidation, conservatorship, bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally from time to time in effect and except that
equitable remedies are subject to judicial discretion. Each of the Transaction
Documents to which the Company is a party, when executed and delivered in
accordance with the terms hereof (and assuming that each such Transaction
Document has been duly executed and delivered by the other parties thereto),
will constitute the legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms except as
enforcement thereof may be limited by liquidation, conservatorship, bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the enforcement
of creditors' rights generally from time to time in effect and except that
equitable remedies are subject to judicial discretion.
Section 3.05. CAPITALIZATION.
(a) As of the date hereof, all of the Percentage Interests in the
Company are owned by the Percentage Interest holders in the respective
amounts set forth opposite their names in column B of Schedule A hereto,
free and clear of all Liens.
(b) The Percentage Interests have been duly authorized and are validly
issued, are fully paid and non-assessable and the Percentage Interest
holders thereof are not, or will not be, entitled to any preemptive or
other similar rights. Except as set forth in Schedule 3.05 or as
contemplated by the Transaction Documents, there are no outstanding (i)
Percentage Interests or other voting securities of the Company, (ii)
securities of the Company convertible into or exchangeable for Percentage
Interests or voting securities of the Company or (iii) options or other
rights to acquire from the Company, or other obligation of the Company to
issue, any Percentage Interests, voting securities or securities
convertible into or exchangeable for Percentage Interests or voting
securities of the Company (the items in clauses (i), (ii) and (iii) being
referred to collectively as the
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"Company Percentage Interests"). There are no outstanding obligations of
the Company to repurchase, redeem or otherwise acquire any Company
Percentage Interests.
Section 3.06. SUBSIDIARIES. The Company does not own any interest in any
corporation or other business entity and, except as set forth in Schedule 3.06,
the Company is not a participant in any partnership or any joint venture with
any third party.
Section 3.07. FINANCIAL STATEMENTS. The Company has delivered to Buyer
(a) the Company's balance sheet for the years ended December 31, 1996 and 1997,
(b) its related statements of income and retained earnings for the fiscal years
then ended, and all related information in connection therewith (collectively,
the "Financial Statements"). All of the Financial Statements present fairly and
accurately the financial position of the Company as of such dates and the
results of the Company's operations for such periods, and are true, correct and
complete in all material respects.
Section 3.08. ABSENCE OF CERTAIN CHANGES. Except as set forth in Schedule
3.08, since the Balance Sheet Date, the business of the Company has been
conducted in the ordinary course consistent with past practices and, except
pursuant to or as contemplated under any Transaction Documents, there has not
been:
(a) any event, occurrence, development, state of circumstances or
facts which has had or could reasonably be expected to have a Material
Adverse Effect;
(b) any declaration, setting aside or payment of any distribution with
respect to any Percentage Interests, or any repurchase, redemption or other
acquisition by the Company of any Percentage Interests or other securities
of, or other ownership interests in, the Company;
(c) any amendment of any material term of any outstanding security of
the Company;
(d) any incurrence, assumption or guarantee by the Company of any
indebtedness for borrowed money exceeding $5,000;
(e) any creation or assumption by the Company of any Lien on any
material asset;
(f) any making of any loan, advance or capital contributions to or
investment in any Person;
(g) any damage, destruction or other casualty loss affecting the
business or assets of the Company not covered by insurance;
(h) any transaction or commitment made, or any contract or agreement
entered into, by the Company relating to its assets or business (including
the acquisition or disposition of any assets) or any relinquishment by the
Company of any contract or other right, in either case, material to the
Company, taken as a whole, other than transactions and commitments in the
ordinary course of business consistent with past practices;
8
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(i) any change in any method of accounting or accounting practice by
the Company;
(j) any (i) employment, deferred compensation, severance, retirement
or other similar agreement entered into with any Manager, Member, officer
or employee of the Company (or any amendment to any such existing
agreement), (ii) grant of any severance or termination pay to any Manager,
Member, officer or employee of the Company other than under existing
arrangements which have been disclosed to Buyer, or (iii) change in
compensation or other benefits payable to any Manager, Member, officer or
employee of the Company pursuant to any severance or retirement plans or
policies thereof, other than in the ordinary course of business consistent
with past practice; or
(k) any labor dispute, other than routine individual grievances, or
any activity or proceeding by a labor union or representative thereof to
organize any employees of the Company, which employees were not subject to
a collective bargaining agreement at the Balance Sheet Date, or any
lockouts, strikes, slowdowns, work stoppages or threats thereof by or with
respect to any employees of the Company.
Section 3.09. NO UNDISCLOSED LIABILITIES. There are no liabilities of the
Company of any kind whatsoever, whether accrued, contingent, absolute,
determined, determinable or otherwise, and there is no existing condition,
situation or set of circumstances which could reasonably be expected to result
in such a liability, other than:
(a) liabilities provided for in the Balance Sheet;
(b) liabilities disclosed on Schedule 3.09; and
(c) liabilities incurred for accounts payable and any accruals of
current liabilities since the Balance Sheet Date in each case in type and
amounts which are accrued in the ordinary course of the Company's business.
Section 3.10. RELATED PARTY TRANSACTIONS. Schedule 3.10 contains a
complete list of all transactions and agreements between the Company, on the one
hand, and any Managers, Members, suppliers, customers or other parties ("Related
Parties"), on the other hand, where an officer, Manager, Member, employee or
holder of 5% or more of the outstanding equity of such Related Party is an
Immediate Family Member of an officer, Manager, Member, employee or holder of 5%
or more of the Percentage Interests in the Company.
Section 3.11. MATERIAL CONTRACTS.
(a) Except as disclosed in Schedule 3.11 and except pursuant to or
as contemplated under any of the Transaction Documents, the Company is not
a party to or bound by:
(i) any lease (whether of real or personal property) providing
for annual rentals of $5,000 or more;
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(ii) any agreement for the purchase of materials, supplies,
goods, services, equipment or other assets that provides for either
(A) annual payments by the Company of $5,000 or more or (B) aggregate
payments by the Company of $5,000 or more;
(iii) any sales, distribution or other similar agreement
providing for the sale by the Company of materials, supplies, goods,
services, equipment or other assets that provides for either (A)
annual payments to the Company of $5,000 or more or (B) aggregate
payments to the Company of $5,000 or more;
(iv) any partnership, joint venture or other similar agreement
or arrangement;
(v) any agreement relating to the acquisition or disposition
of any business (whether by merger, sale of stock, sale of assets or
otherwise);
(vi) any agreement relating to indebtedness for borrowed money
or the deferred purchase price of property (in either case, whether
incurred, assumed, guaranteed or secured by any asset), except any
such agreement with an aggregate outstanding principal amount not
exceeding $5,000 and which may be prepaid on not more than 30 days
notice without the payment of any penalty;
(vii) any license, franchise or similar agreement that provides
for either (A) annual payments to or from the Company of $5,000 or
more or (B) aggregate payments to or from the Company of $5,000 or
more;
(viii) any agency, dealer, sales representative, marketing or
other similar agreement for that provides for either (A) annual
payments by the Company of $5,000 or more or (B) aggregate payments by
the Company of $5,000 or more;
(ix) any agreement that limits the freedom of the Company to
compete in any line of business or with any Person or in any area or
which would so limit the freedom of the Company;
(x) any agreement with any other Person directly or indirectly
owning, controlling or holding with power to vote 5% or more of the
outstanding voting securities of any Affiliate;
(xi) any agreement with any Manager, Member, officer of the
Company or with any "associate" or any member of the "immediate
family" (as such terms are respectively defined in Rules 12b-2 and
16a-1 of the 1934 Act) of any such Manager, Member or officer; or
(xii) any other agreement, commitment, arrangement or plan not
made in the ordinary course of business that is material to the
Company, taken as a whole.
(b) Each agreement, commitment, arrangement or plan disclosed in any
Schedule to this Agreement or required to be disclosed pursuant to this
Section is a valid and
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binding agreement of the Company, and is in full force and effect, and
neither the Company nor any other party thereto is in default or breach in
any material respect under the terms of any such agreement, contract, plan,
lease, arrangement or commitment.
Section 3.12. LITIGATION.
(a) There is no action, suit, investigation or proceeding (or any
basis therefor) pending against or to the best of the Company's or Selling
Holder's knowledge threatened against or affecting, the Company or any of
its properties before any court or arbitrator or any governmental body,
agency or official. None of the Company, the Selling Holders or any
Manager has any reason to believe that any such action, suit, investigation
or proceeding will be brought against the Company.
(b) Except as disclosed on Schedule 3.12, no officer, Manager, Member,
key management employee or sales representative or Immediate Family Member
of an officer, Manager, Member, key management employee or sales
representative of the Company has been convicted in a criminal proceeding,
is a named subject of a criminal proceeding which is presently pending
(excluding traffic violations and other minor offenses) or is to the
knowledge of such Person the subject of a criminal investigation.
Section 3.13. COMPLIANCE WITH LAWS AND COURT ORDERS; NO DEFAULTS. The
Company is not in violation of, and has not since the Balance Sheet Date
violated, any applicable law, rule, regulation, judgement, injunction, order or
decree except for a violation that could not be reasonably expected to have a
Material Adverse Effect.
Section 3.14. PROPERTIES.
(a) Except as set forth on Schedule 3.14, the Company has good title
to, or in the case of leased property has valid leasehold interests in, all
personal property and assets (whether tangible or intangible) reflected on
the Balance Sheet or acquired after the Balance Sheet Date, except for
property and assets sold since the Balance Sheet Date in the ordinary
course of business consistent with past practices. The Company has a valid
and insurable fee simple title to, or in the case of leased real property
has valid leasehold interests in, all real property reflected on the
Balance Sheet or acquired after the Balance Sheet Date. None of such
property or assets (whether real or personal) is subject to any Liens,
except:
(i) Liens disclosed on the Balance Sheet; or
(ii) Liens for taxes not yet due or being contested in good faith
(and for which adequate accruals or reserves have been established on
the Balance Sheet).
(b) There are no developments affecting any such property or assets
(whether real or personal) pending or threatened, which might materially
detract from the value of such property or assets, or materially interfere
with any present use of any such property or assets.
(c) Except as set forth in Schedule 3.14, the plant and equipment
owned by the Company has been reasonably maintained consistent with
standards generally followed in
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the industry (giving due account to the age and length of use of same,
ordinary wear and tear excepted) and are adequate and suitable for their
present uses and, in the case of plants, buildings and other structures
(including the roofs thereof), are structurally sound.
(d) All real property currently has access to (i) public roads or
valid easements for such ingress to and egress from all such real property
and (ii) water supply, storm and sanitary sewer facilities, telephone, gas
and electrical connections, fire protection, drainage and other public
utilities, in each case as is necessary for the conduct of the businesses
of the Company as heretofore conducted and none of the structures on any
such owned or leased real property encroaches upon real property of another
person, and no structure of any other person substantially encroaches upon
any of such owned or leased real property.
(e) Except as disclosed in Schedule 3.14, the property and assets
owned or leased by the Company, or which it otherwise has the right to use,
constitutes all of the property and assets held for use or used in
connection with the business of the Company and is generally adequate to
conduct such business as currently conducted by the Company.
Section 3.15. PRODUCTS.
(a) Each of the products produced, developed or sold by the Company
is, and at all times up to and including the sale thereof by the Company
has been (a) in compliance in all material respects with all applicable
federal, state, and local laws and regulations and (b) conforms in all
material respects to any promises or affirmations of fact made on the
container or label for such product or in connection with its sale, subject
to returns, repairs, defects and allowances consistent with past practice.
(b) There is no design defect with respect to any of such products
and, to the best of the Company's or Selling Holder's knowledge, each of
such products contains adequate warnings, presented in a reasonably
prominent manner, in accordance with applicable laws, rules and regulations
and current industry practice with respect to its contents and use.
(c) The NeuSight Software and such other proprietary software
currently used by the Company as set forth in Schedule 3.15(c), and any and
all enhancements, upgrades, customizations, modifications and maintenance
thereof (the "Proprietary Software"), currently sold, licensed or otherwise
used by the Company in its business, containing or calling on a calendar
function including without limitation, any function indexed to the CPU
clock, and any function providing specific dates or days, or calculating
spans of dates or days, shall record, store, process, provide, and, where
appropriate, insert true and accurate dates and calculations for dates and
spans including January 1, 2000.
(d) The NeuSight Software is free from significant programming errors
and operates in substantial conformity with its user documentation and
other descriptions and standards applicable thereto provided by the Company
and, to the best of the Company's knowledge, after due inquiry, does not
contain any known virus, timer, clock, counter or other limiting design,
instruction or routine, that would erase data, programming or become
inoperable or otherwise incapable of being used in the full manner for
which it was designed and created.
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Section 3.16. INTELLECTUAL PROPERTY.
(a) Schedule 3.16 contains a list of all Intellectual Property Rights
owned or licensed and used or held for use by the Company ("Company
Intellectual Property Rights"), specifying as to each, as applicable: (i)
the nature of such Intellectual Property Right; (ii) the owner of such
Intellectual Property Right; (iii) the jurisdictions by or in which such
Intellectual Property Right is recognized without regard to registration or
has been issued or registered or in which an application for such issuance
or registration has been filed, including the respective registration or
application numbers; and (iv) licenses, sublicenses and other agreements as
to which the Company is a party and pursuant to which any Person is
authorized to use such Intellectual Property Right, including the identity
of all parties thereto, a description of the nature and subject matter
thereof, the applicable royalty and the term thereof.
(b) The Company Intellectual Property Rights constitute all
Intellectual Property Rights necessary for the operation of the Company's
business as presently conducted and as presently proposed to be conducted.
The Company Intellectual Property Rights will be owned or available for use
by the Company on identical terms and conditions immediately subsequent to
the Closing hereunder. The Company has taken all necessary and desirable
action to protect the Company Intellectual Property Rights. No Company
Intellectual Property Rights are involved in any interference or re-
examination or cancellation or opposition proceeding and neither the
Company nor each Selling Holder, as to itself, has been notified or alerted
that any such proceeding will hereafter be commenced. Except as set forth
in Schedule 3.16, neither the Company nor each Selling Holder, as to
itself, has any basis for provoking or initiating an interference or
opposition proceeding with respect to any Intellectual Property Right held
or used by others, and does not have any basis for believing that any of
the Company Intellectual Property Rights are being infringed by others.
(c) The Company has not been a defendant in any action, suit,
investigation or proceeding relating to, or otherwise has been notified of,
any alleged claim or infringement of the Company Intellectual Property
Rights, and the Company and the Selling Holders have no knowledge of any
such infringement by the Company or the Company Intellectual Property
Rights with the intellectual property of others, and (ii) the Company and
the Selling Holders have no knowledge of any continuing infringement by any
other Person of any Company Intellectual Property Rights. Except as set
forth on Schedule 3.16, the Company has not entered into any agreement to
indemnify any other Person against any charge of infringement,
misappropriation or other conflict with respect to any Intellectual
Property Right.
(d) The Company has delivered to Buyer correct and complete copies of
all such Company patents, registrations, applications, licenses,
agreements, and permissions (as amended to date) relating to Company
Intellectual Property Rights and has made available to Buyer correct and
complete copies of all other written documentation evidencing ownership and
prosecution (if applicable) of each such Company Intellectual Property
Right. With respect to each Intellectual Property Right that the Company
owns:
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(i) all patents, copyrights and trademarks included in the Company
Intellectual Property Rights are valid and in full force and all
applications listed on Schedule 3.16 as pending have been prosecuted in
good faith as required by law and are in good standing;
(ii) the identified owner possesses all right, title, and interest
in and to the item;
(iii) the item is not subject to any outstanding judgment, order,
decree, stipulation, injunction, or charge; and
(iv) no charge, complaint, action, suit, proceeding, hearing,
investigation, claim, or demands pending or to the knowledge of the Company
and the Selling Holders (and employees with responsibility for Intellectual
Property Right matters) is threatened which challenges the legality,
validity, enforceability, use, or ownership of the Intellectual Property
Right.
(e) The Company has supplied Buyer with correct and complete copies of all
such licenses, sublicenses, agreements, and permissions (as amended to date)
with respect to such Intellectual Property Right. With respect to each such
Intellectual Property Right:
(i) the license, sublicense, agreement, or permission covering the
item is legal, valid, binding, enforceable, and in full force and effect;
(ii) the license, sublicense, agreement, or permission will continue
to be legal, valid, binding, enforceable, and in fully force and effect on
identical terms following the Closing;
(iii) no party to the license, sublicense, agreement, or permission
is in breach or default, and no event has occurred which with notice or
lapse of time would constitute a breach or default or permit termination,
modification, or acceleration thereunder;
(iv) no party to the license, sublicense, agreement, or permission
has repudiated any provision thereof;
(v) with respect to each sublicense, the representations and
warranties set forth in subsections (i) through (iv) above are true and
correct with respect to the underlying license;
(vi) the underlying item of the Intellectual Property Right is not
subject to any outstanding judgment, order, decree, stipulation,
injunction, or charge; and
(vii) no charge, complaint, action, suit, proceeding, hearing,
investigation, claim, or demand is pending, or to the knowledge of any of
the Company and the Selling Holders and officers (and employees with
responsibility for Intellectual Property Right matters) is threatened which
challenges the legality, validity, or enforceability of the underlying item
of the Intellectual Property Right.
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Section 3.17. INSURANCE COVERAGE. The Company has furnished to Buyer a
list of, and true and complete copies of, all insurance policies and fidelity
bonds relating to the assets, business, operations, employees, officers or
Managers or Members. There is no claim by the Company pending under any of such
policies or bonds as to which coverage has been questioned, denied or disputed
by the underwriters of such policies or bonds or in respect of which such
underwriters have reserved their rights. All premiums payable under all such
policies and bonds have been paid timely and the Company has otherwise complied
fully with the terms and conditions of all such policies and bonds. Such
policies of insurance and bonds (or other policies and bonds providing
substantially similar insurance coverage) are in full force and effect. Such
policies and bonds are of the type and in amounts customarily carried by Persons
conducting businesses similar to those of the Company. The Company does not
know of any threatened termination of, premium increase with respect to, or
material alteration of coverage under, any of such policies or bonds. Except as
disclosed in Schedule 3.17, the Company shall after the Closing continue to have
coverage under such policies and bonds with respect to events occurring prior to
the Closing.
Section 3.18. LICENSES AND PERMITS.
(a) Schedule 3.18 correctly describes each license, franchise, permit
or other similar authorization affecting, or relating in any way to, the
assets or business of the Company which are material to the Company taken
as a whole (the "Permits") together with the name of the government agency
or entity issuing such Permit. Except as set forth on the Schedule 3.18,
such Permits are valid and in full force and effect and none of the Permits
will be terminated or impaired or become terminable, in whole or in part,
as a result of the transactions contemplated hereby.
(b) The Company has all licenses, franchises, permits or other similar
authorizations, and all approvals of governmental or regulatory authorities
as are required to operate its business, as presently conducted and as
presently proposed to be conducted, in each state of the United States
where it is engaged in such activity.
Section 3.19. INVENTORIES. The inventories set forth in the Balance Sheet
were properly stated therein at the lesser of cost or fair market value. Since
the Balance Sheet Date, the inventories of the Company have been maintained in
the ordinary course of business.
Section 3.20. LOANS, NOTES, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE. All
receivables of the Company, including the loans, notes and accounts receivable
reflected on the Balance Sheet and all such loans, notes and accounts receivable
arising after the Balance Sheet Date, (i) arose, and have arisen, from bona fide
transactions of the Company in the ordinary course of business; (ii) represent
the actual obligations of its customers or the party to the instrument; (iii)
are current and are expected to be collected in the aggregate face amounts
thereof without any counterclaim or setoff when due; and (iv) the reserves
accrued for doubtful accounts are reasonably valued and are computed in
accordance with past practice as reflected in the Balance Sheet. Accounts
payable of the Company reflected on the Balance Sheet and all accounts payable
arising after the Balance Sheet Date arose, and have arisen, from bona fide
transactions in the ordinary course of business.
Section 3.21. PROJECTIONS. The financial projections relating to the
Company delivered to Buyer are made in good faith and are based upon reasonable
assumptions, and the Company and the
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Selling Holders are not aware of any fact or set of circumstances that would
lead it to believe that such projections are incorrect or misleading in any
material respect.
Section 3.22. FINDERS' FEES. No investment banker, broker, finder or
other intermediary is entitled to any fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of the Company.
Section 3.23. EMPLOYEES. Schedule 3.23 sets forth a true and complete
list of the names, titles, annual salaries and other compensation of all
officers of the Company and all other employees, consultants and independent
contractors to the Company, and none of such employees and no other key employee
of the Company has indicated to the Company or the Selling Holders that he
intends to resign or retire as a result of the transactions contemplated by this
Agreement or otherwise within three years after the Closing Date.
Section 3.24. LABOR MATTERS. The Company is in compliance with all
currently applicable laws respecting employment and employment practices, terms
and conditions of employment and wages and hours, and is not engaged in any
unfair labor practice. There is no unfair labor practice complaint pending or
threatened against the Company before the National Labor Relations Board or any
other similar state or local agency.
Section 3.25. ENVIRONMENTAL MATTERS. Except as disclosed on Schedule
3.25, the Company is not in violation of any federal, state, or local
Environmental Laws applicable to it or its properties, or any material
limitations, restrictions, conditions, standards, obligations or timetables
contained in any Environmental Law. No notice or action alleging such violation
is pending or, to the Company's knowledge, threatened, and no past or present
condition or practice of the businesses conducted by the Company would prevent
continued compliance with any Environmental Permits or give rise to any common
law or statutory liability or otherwise form the basis of any claim, action or
proceeding with respect to the Company involving any Hazardous Substances. To
the Company's knowledge, the Company has no Environmental Liability.
Section 3.26. FULL DISCLOSURE. No representation or warranty made by the
Company and the Selling Holders in this Agreement, nor any written statement
furnished to Buyer pursuant hereto, or in connection with the transactions
contemplated hereby, heretofore furnished to Buyer by the Company and the
Selling Holders, contains or will contain any statement which constitutes an
untrue statement of a material fact or fails or will fail to state a material
fact which was necessary to make the statements or facts contained herein or
therein not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE SELLING HOLDERS
Each of the Selling Holders hereby represents and warrants to Buyer with
respect to itself, and not with respect to any other Selling Holder, as follows:
Section 4.01. TITLE TO PERCENTAGE INTERESTS. Each Selling Holder owns the
Percentage Interests set forth opposite its name in column B of Schedule A
hereto free and clear of any Lien, adverse claim, restriction on sale or
transfer (other than restrictions imposed by applicable securities
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laws), preemptive right, limitations on voting rights or option and has the
authority to dispose of such Purchased Interests pursuant to this Agreement.
Section 4.02. EFFECT OF AGREEMENT ON SELLING HOLDERS. The execution,
delivery and performance of this Agreement and the Transaction Documents to
which it is a party by each Selling Holder and the consummation by each Selling
Holder of the transactions contemplated hereby and thereby will not require any
notice to, filing with, or the consent, approval or authorization of any person
or governmental authority. This Agreement when executed and delivered by the
Selling Holders will constitute the legal, valid and binding obligation of the
Selling Holders, enforceable against the Selling Holders in accordance with its
terms, except as enforcement thereof may be limited by liquidation,
conservatorship, bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting the enforcement of creditors' rights generally from time to time
in effect and except that equitable remedies are subject to judicial discretion.
Each of the Transaction Documents to which the Selling Holders are a party, when
executed and delivered in accordance with the terms thereof, will constitute the
legal, valid and binding obligation of the Selling Holders, enforceable against
the Selling Holders in accordance with its terms, except as enforcement thereof
may be limited by liquidation, conservatorship, bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally from time to time in effect and except that
equitable remedies are subject to judicial discretion.
Section 4.03. LITIGATION. There are no claims, actions, suits,
arbitrations, grievances, proceedings or investigations pending or, to the best
knowledge of each Selling Holder threatened, against such Selling Holder, at
law, in equity or before any federal, state, municipal or other governmental or
nongovernmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, involving the transactions contemplated
hereby.
Section 4.04. SELLING HOLDER AGREEMENTS. Except as set forth in Schedule
4.04, there are no agreements, written or oral, between the Company and any
Selling Holder or between the Selling Holders, relating to the acquisition
(including without limitation rights of first refusal or pre-emptive rights),
disposition, registration under the 1933 Act, as amended, or voting of the
Percentage Interests or any other agreements between the Company and the Selling
Holders.
Section 4.05. FULL DISCLOSURE. No representation or warranty of the
Selling Holders made in this Agreement, nor any written statement furnished to
Buyer pursuant hereto, or in connection with the transactions contemplated
hereby, heretofore furnished to Buyer by the Selling Holders, contains or will
contain any statement which constitutes an untrue statement of a material fact
or fails or will fail to state a material fact which was necessary to make the
statements or facts contained herein or therein not misleading.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to the Company and the Selling Holders
as follows:
Section 5.01. CORPORATE EXISTENCE AND POWER. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has all corporate or powers and all governmental licenses,
authorizations, permits, consents and approvals required to carry on its
business as now conducted.
Section 5.02. CORPORATE AUTHORIZATION. The execution, delivery and
performance by Buyer of this Agreement and any other Transaction Document to
which it is a party are within the corporate powers of Buyer and have been duly
authorized by all necessary corporate action on the part of Buyer.
Section 5.03. GOVERNMENTAL AUTHORIZATION. The execution, delivery and
performance by Buyer of this Agreement and any other Transaction Document to
which it is a party require no action by or in respect of, or filing with, any
governmental body, agency or official.
Section 5.04. NON-CONTRAVENTION. The execution, delivery and performance
by Buyer of this Agreement and any other Transaction Document to which it is a
party do not and will not (a) violate its certificate of incorporation, as
amended, or Bylaws, as amended, (b) violate any applicable law, rule,
regulation, judgment, injunction, order or decree binding upon Buyer, or (c)
require consent or other action to any Person under any agreement or other
instrument binding upon Buyer. This Agreement has been duly executed and
delivered by the Buyer and (assuming that it has been duly executed and
delivered by the Company and Selling Holders), constitutes a legal, valid and
binding obligation of the Buyer, enforceable against the Buyer in accordance
with its terms except as enforcement thereof may be limited by liquidation,
conservatorship, bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting the enforcement of creditors' rights generally from time to time
in effect and except that equitable remedies are subject to judicial discretion.
Each of the Transaction Documents to which the Buyer is a party, when executed
and delivered in accordance with the terms hereof (and assuming that each such
Transaction Document has been duly executed and delivered by the other parties
thereto), will constitute the legal, valid and binding obligation of the Buyer,
enforceable against the Buyer in accordance with its terms except as enforcement
thereof may be limited by liquidation, conservatorship, bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally from time to time in effect and except that
equitable remedies are subject to judicial discretion.
Section 5.05. FINDERS' FEES. With the exception of Steve Drawe of STEP
Management which will receive a fee from Buyer, for which Buyer shall be solely
responsible, no investment banker, broker, finder or other intermediary is
entitled to any fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by Buyer.
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ARTICLE VI
COVENANTS OF THE PARTIES
Section 6.01. BEST EFFORTS. Subject to the terms and conditions of this
Agreement, each of the parties will use its best efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary or
desirable under applicable laws and regulations to consummate the transactions
contemplated by this Agreement. Each of the parties agrees to execute and
deliver such other documents, certificates, agreements and other writings and to
take such other actions as may be necessary or desirable in order to consummate
or implement expeditiously the transactions contemplated by this Agreement.
Section 6.02. CERTAIN FILINGS. Each of the parties shall cooperate with
one another (a) in determining whether any action by or in respect of, or filing
with, any governmental body, agency, official or authority is required, or any
actions, consents, approvals or waivers are required to be obtained from parties
to any material contracts, in connection with the consummation of the
transactions contemplated by this Agreement and (b) in taking such actions or
making any such filings, furnishing information required in connection therewith
and seeking timely to obtain any such actions, consents, approvals or waivers.
Section 6.03. NONCOMPETITION; NONSOLICITATION. In order that Buyer may
have and enjoy the benefit of the acquisition of the Purchased Interests, each
individual of the Lucier Group, Terry V. Radl and Richard W. Vesel shall not,
and shall cause its or their Affiliates and associates not to, directly or
indirectly, for a period of five years commencing on the Closing Date, (a)
engage (as owner, stockholder, partner or otherwise, except as a holder of fewer
than 5% of the outstanding common stock or other equity interests of a company
whose common stock or other equity interests are publicly traded) in any
business which directly or indirectly competes with the business of the Company
or its Affiliates, as now conducted or currently intended to be conducted; (b)
induce any employee of the Company or any of its Affiliates to engage in any
activity in which the Lucier Group, Terry V. Radl or Richard W. Vesel are
prohibited from engaging by subsection (a) or to terminate his employment with
the Company or any of its Affiliates, and will not directly or indirectly employ
or offer employment to any person who was employed by the Company or any of its
Affiliates unless such person shall have been terminated without cause or ceased
to be employed by the Company or any of its Affiliates for a period of at least
12 months; or (c) make any statement or take any action intended to impair the
goodwill or the business reputation of the Company, its Affiliates or
Subsidiaries, or to be otherwise detrimental to the interests of the Company, or
any of its Affiliates or Subsidiaries, including any action or statement
intended, directly or indirectly, to benefit a competitor of the Company, its
Affiliates or Subsidiaries (notwithstanding the foregoing, Richard W. Vesel's
current and continued employment with Bailey Controls shall not be deemed to
violate the terms and provisions of clause (a) of this Section 6.03). It is
expressly understood and agreed that although the Lucier Group, Terry V. Radl,
Richard W. Vesel and the Company consider the restrictions contained in this
Section 6.03 to be reasonable, if a final judicial determination is made by a
court of competent jurisdiction that the time and territory or any other
restriction contained in this Section 6.03 is an unenforceable restriction
against the Lucier Group, Terry V. Radl or Richard W. Vesel the provisions of
this Section 6.03 shall not be rendered void but shall be deemed amended to
apply as to such maximum time and territory and to such maximum extent as such
court may judicially determine or indicate to be enforceable. Alternatively, if
any court of competent jurisdiction finds that any restriction contained in this
Section 6.03 is unenforceable, and
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such restriction cannot be amended so as to make it enforceable, such finding
shall not affect the enforceability of any of the other restrictions contained
herein.
Section 6.04. CONFIDENTIALITY. Each individual of the Lucier Group, Terry
V. Radl and Richard W. Vessel will treat and hold as such all Confidential
Information, refrain from using any of the Confidential Information except in
connection with this Agreement, and deliver promptly to the Company or destroy,
at the request and option of the Company, all tangible embodiments (and all
copies) of the Confidential Information which are in his or its possession. In
the event that any individual of the Lucier Group, Terry V. Radl and Richard W.
Vesel are requested or required (by oral question or request for information or
documents in any legal proceeding, interrogatory, subpoena, civil investigative
demand, or similar process) to disclose any Confidential Information that
individual will promptly notify the Company of the request or requirement so
that the Company may seek an appropriate protective order or waive compliance
with the provisions of this Section 6.04. If, in the absence of a protective
order or the receipt of a waiver hereunder, any individual of the Lucier Group
is, on the advice of counsel, compelled to disclose any Confidential Information
to any tribunal or else stand liable for contempt, that individual may disclose
the Confidential Information to the tribunal; provided, however, that the
disclosing individual shall use his best efforts to obtain, at the request of
the Buyer, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Buyer shall designate. The foregoing provisions shall not
apply to any Confidential Information which is generally available to the public
immediately prior to the time of disclosure.
ARTICLE VII
TAX REPRESENTATIONS AND COVENANTS
Section 7.01. TAX DEFINITIONS. The following terms, as used herein, have
the following meanings:
"Code" means the Internal Revenue Code of 1986, as amended.
"Pre-Closing Tax Period" means any Tax period ending on or before the close
of business on the Closing Date or, in the case of any Tax period which
includes, but does not end on, the Closing Date, the portion of such period up
to and including the Closing Date.
"Tax" means (a) any net income, alternative or add-on minimum tax, gross
income, gross receipts, sales, use, ad valorem, value added, transfer,
franchise, profits, license, withholding, payroll, employment, excise,
severance, stamp, occupation, premium, property, environmental or windfall
profit tax, custom, duty or other tax, governmental fee or other like assessment
or charge of any kind whatsoever, together with any interest, penalty, addition
to tax or additional amount imposed by any governmental authority (domestic or
foreign) responsible for the imposition of any such tax (a "Taxing Authority"),
(b) any liability of the Company for the payment of any amount of the type
described in clause (a) above as a result of being a member of an affiliated,
consolidated, combined or unitary group and (c) any liability of the Company for
the payment of any amount as a result of being party to any Tax Sharing
Agreement or with respect to the payment of any amounts of the type described in
clauses (a) or (b) above as a result of any express or implied obligation to
indemnify any other Person.
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"Tax Asset" means any net operating loss, net capital loss, investment tax
credit, foreign tax credit, charitable deduction carryover or any other credit
or tax attribute which could reduce Taxes (including, without limitation,
credits or other tax attributes which could reduce alternative minimum Taxes).
"Tax Sharing Agreement" means any existing Tax sharing agreements or
arrangements (whether or not written) binding the Company and any other
agreement or arrangement (including any arrangement required or permitted by
law) which (a) requires the Company to make any Tax payment to or for the
account of any other Person, (b) affords any other Person to utilize any Tax
Asset of the Company to reduce such other Person's Taxes, (c) affords the
Company to utilize any Tax Asset of any other Person to reduce any Taxes of the
Company (d) requires or permits the transfer or assignment of income, revenues,
receipts, or gains or (e) requires or permits the Company to determine its Tax
liability by taking into account or by reference to the Tax liability, income,
revenues, receipts or gains of any other Person.
Section 7.02. TAX REPRESENTATIONS AND COVENANTS.
(a) Except as set forth in the Balance Sheet or otherwise disclosed to
Buyer or on Schedule 7.02(a) the Company represents and warrants to Buyer
as of the date hereof as follows:
(i) all Tax returns, statements, reports and forms (including
estimated tax or information returns and reports) required to be filed with
any Taxing Authority with respect to any Pre-Closing Tax Period by or on
behalf of the Company (collectively, the "Returns") have been or will be
timely filed when due in accordance with all applicable laws, except where
the failure to file would not subject the Company to any liabilities
(including any interest, penalties or addition-to-tax);
(ii) as of the time of filing, the Returns correctly reflected
(and, as to any Returns not filed as of the date hereof, will correctly
reflect) in all material respects the facts regarding the income, business,
assets, operations, activities and status of the Company and any other
information, as required to be shown therein;
(iii) all Taxes shown as due and payable on the Returns that
have been filed have been timely paid, or withheld and remitted to the
appropriate Taxing Authority;
(iv) the charges, accruals and reserves for Taxes with respect
to the Company for any Pre-Closing Tax Period (including any Pre-Closing
Tax Period for which no Return has yet been filed) reflected on the Balance
Sheet and the books of the Company (excluding any provision for deferred
income taxes) are adequate to cover such Taxes;
(v) the Company is not delinquent in the payment of any Tax or
has requested any extension of time within which to file any Return, which
Return has not yet been filed;
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(vi) the Company (or any member of any affiliated,
consolidated, combined or unitary group of which the Company is or has
been a member) has not granted any extension or waiver of the statute
of limitations period applicable to any Return, which period (after
giving effect to such extension or waiver) has not yet expired;
(vii) there is no claim, audit, action, suit, proceeding, or
investigation now pending or threatened (including, any issues that,
to the knowldge of the Company, may be raised by any Taxing Authority)
against or with respect to the Company in respect of any Tax or Tax
Asset;
(viii) the Company has not filed any request for ruling or
determination of any Taxing Authority in respect of any Tax which has
been denied during the past five years or which is pending;
(ix) the Company does not own any interest in real property in
the State of New York or in any other jurisdiction in which a Tax is
imposed on the transfer of a controlling interest in an entity that
owns any interest in real property;
(x) the Company has not been a member of an affiliated,
consolidated, combined or unitary group;
(xi) the Company is not a party to any Tax Sharing Agreement or
is otherwise under any obligation to pay any third party an amount
with respect to any Tax;
(xii) the Company or any Affiliate of the Company has not, to
the extent it may affect or relate to the Company, made or changed any
tax election, changed any annual tax accounting period, adopted or
changed any method of tax accounting, filed any amended Return,
entered into any closing agreement, settled any Tax claim or
assessment, surrendered any right to claim a Tax refund, consented to
any extension or waiver of the limitation period applicable to any Tax
claim or assessment, which would have the effect of increasing the Tax
liability or decreasing any Tax Asset of the Company; and
(xiii) prior to the Closing Date, the Company shall not reserve
any amount for or make any payment of Taxes to any other person or any
Taxing Authority except for such Taxes as are due or payable to the
Taxing Authority or have been properly estimated in accordance with
applicable law as applied in a manner consistent with past practice of
the Company.
(b) Schedule 7.02(b) contains a list of all jurisdictions (whether
foreign or domestic) to which any Tax is properly payable by the Company.
(c) Schedule 7.02(c) contains an accurate description of current
audit issues relating to any Tax, and Schedule 7.02(c) contains copies of
revenue agent's or similar reports furnished by any Taxing Authority for
the taxable years which have not been
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examined and closed or with respect to which the applicable period for
assessment under applicable law, after giving effect to extensions or
waivers, has expired.
ARTICLE VIII
EMPLOYEE BENEFITS
Section 8.01. EMPLOYEE BENEFITS DEFINITIONS. The following terms, as used
herein, shall have the following meanings:
"Benefit Arrangement" means each employment, severance or other similar
contract, arrangement or policy or any plan or arrangement (whether or not
written) providing for severance benefits, insurance coverage (including any
self-insured arrangements), workers' compensation, disability benefits,
supplemental unemployment benefits, vacation benefits, pension or retirement
benefits or for deferred compensation, profit-sharing, bonuses, options, or
other forms of incentive compensation or post-retirement insurance, compensation
or benefits which (a) is entered into, maintained or contributed to, as the case
may be, by the Company or any of its Affiliates and (b) covers any employee or
former employee of the Company.
"Employee Plan" means any "employee benefit plan," as defined in Section
3(3)of ERISA, that (i) is subject to any provision of ERISA, (ii) is maintained,
administered or contributed to by the Company or any of its ERISA Affiliates and
(iii) covers any employee or former employee of the Company.
Section 8.02. EMPLOYEE PLANS. The Company does not maintain any Employee
Plans except for those Employee Plans disclosed on Schedule 8.02.
Section 8.03. BENEFIT ARRANGEMENTS.
(a) Schedule 8.03 identifies each Benefit Arrangement. The Company
has provided Buyer with copies or descriptions of each Benefit Arrangement.
Each Benefit Arrangement has been maintained in substantial compliance in
all material respects with its terms and with the requirements prescribed
by any and all statutes, orders, rules and regulations which are applicable
to such Benefit Arrangement.
(b) Except as disclosed in writing to Buyer prior to the date hereof,
there has been no amendment to employee participation or coverage under any
Benefit Arrangement which would increase materially the expense of
maintaining such Employee Plan or Benefit Arrangement above the level of
the expense incurred in respect thereof for the most recent fiscal year.
Section 8.04. NO THIRD-PARTY BENEFICIARIES. No provision of this Article
VIII shall create any third-party beneficiary or other rights in any employee or
former employee (including any beneficiary or dependent thereof) of the Company
in respect of continued employment (or resumed employment) with the Company and
no provision of this Article VIII shall create any such rights in any such
Persons in respect of any benefits that may be provided, directly or indirectly,
under any Benefit Arrangement or any plan or arrangement which may be
established by the Company after the Closing Date. No provision of this
Agreement shall constitute a limitation on rights to amend,
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modify or terminate after the Closing Date any Benefit Arrangement or any other
plans or arrangements of the Company.
ARTICLE IX
CONDITIONS TO CLOSING
Section 9.01. CONDITIONS TO OBLIGATIONS OF THE PARTIES. The obligations
of each of the parties to consummate the Closing shall be conditioned upon the
satisfaction or waiver (in whole or in part) of each of the following conditions
concurrently with or prior to Closing:
(a) No provision of any applicable law or regulation and no judgment,
injunction, order or decree shall prohibit the consummation of the Closing.
(b) All actions by or in respect of or filings with any governmental
body, agency, official or authority required to permit the consummation of
the Closing shall have been taken, made or obtained.
(c) No proceeding challenging this Agreement or the transactions
contemplated hereby or seeking to prohibit, alter, prevent or materially
delay the consummation of this Agreement shall have been instituted by any
Person before any court, arbitrator or governmental body, agency or
official and be pending.
Section 9.02. CONDITIONS TO OBLIGATION OF BUYER. The obligation of Buyer
to consummate the Closing shall be conditioned upon the satisfaction or waiver
(in whole or in part) of each of the following conditions concurrently with or
prior to Closing:
(a) The Company and the Selling Holders shall have performed in all
material respects all of their obligations hereunder required to be
performed by them on or prior to the Closing Date, (ii) the representations
and warranties of the Company and the Selling Holders contained in this
Agreement and in any certificate or other writing delivered by the Company
and the Selling Holders pursuant hereto, disregarding all qualifications
and exceptions contained therein relating to materiality or Material
Adverse Effect, shall be true at and as of the Closing Date, and (iii)
Buyer shall have received a certificate signed by an authorized Manager of
the Company and the Selling Holders to the foregoing effect.
(b) There shall not be threatened, instituted or pending any action
or proceeding by any Person before any court or governmental authority or
agency, domestic or foreign, (i) seeking to restrain or prohibit the
ownership or operation by Buyer or any of its Affiliates of all or any
material portion of the business or assets of the Company or of Buyer or
any of their Affiliates or to compel Buyer or any of its Affiliates to
dispose of all or any material portion of the business or assets of the
Company or of Buyer or any of their Affiliates, (ii) seeking to impose or
confirm limitations on the ability of Buyer or any of its Affiliates
effectively to exercise full rights of ownership of the Percentage
Interests, including without limitation, the right to vote any Percentage
Interests acquired or owned by Buyer or any of its Affiliates on all
matters properly presented to the Members, or (iii) seeking to require
divestiture by Buyer or any of its Affiliates of any Percentage Interests.
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Section 9.03. CONDITIONS TO OBLIGATION OF THE COMPANY AND THE SELLING
HOLDERS. The obligation of the Company and the Selling Holders to consummate
the Closing shall be conditioned upon the satisfaction or waiver (in whole or in
part) of each of the following conditions concurrently with or prior to Closing:
(a) Buyer shall have performed in all material respects all of its
obligations hereunder required to be performed by it at or prior to the
Closing Date, (ii) the representations and warranties of Buyer contained in
this Agreement and in any certificate or other writing delivered by Buyer
pursuant hereto, disregarding all qualifications and exceptions contained
therein relating to materiality or Material Adverse Effect, shall be true
at and as of the Closing Date, and (ii) the Company shall have received a
certificate signed by an officer of Buyer to the foregoing effect.
ARTICLE X
CREDIT ACCOMMODATIONS
Section 10.01. WORKING CAPITAL LINE. Buyer hereby covenants and agrees to
make available, or cause to be made available, to the Company a line of credit
("Working Capital Line") in the maximum amount of $1,400,000 (the "Maximum
Amount"), subject to the terms and conditions contained in this Article X. Each
advance by Buyer to the Company under the Working Capital Line shall be
individually an "Advance and collectively the "Advances."
Section 10.02. FORM OF ADVANCES. Advances under the Working Capital Line
shall at the option of Buyer be in the form of direct advances, third party
advances or a combination of both, as follows:
(a) Direct Advances. Any Advance directly funded by Buyer shall be
----------------
evidenced by a master promissory note ("Master Note"), duly executed by the
Company, in the form of Exhibit I attached hereto. The Master Note shall
be secured by a first priority perfected security interest in all of the
Company's assets as evidenced by a security agreement substantially in the
form of Exhibit J attached hereto.
(b) Third Party Advances. In satisfaction of Buyer's obligation
---------------------
hereunder Buyer may enter into an agreement with a third party to provide
an Advance (a "Third Party Advance"). Third Party Advances may be made in
the form of a government grant, bank letter of credit or other form of
financing. No Third Party Advance shall cause the Percentage Interests of
the Members to be diluted. In addition, (i) for bank lines of credit or
other bank financings, the terms and conditions of the Third Party Advance
shall be substantially similar to Advances made by Buyer pursuant to the
Master Note; and (ii) for Advances made other than pursuant to clause (i)
shall be made in accordance with terms and provisions mutually acceptable
to Buyer and the Company. If the Company rejects the terms of a Third
Party Advance, made in accordance with clause (i) Buyer shall have no
further obligations to fund an Advance or make any other Advance for a
period of six months after the date of such rejection.
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Section 10.03. CONDITIONS TO ADVANCES. Buyer's obligations to provide or
arrange for an Advance is expressly conditioned upon the following:
(a) The Company shall provide Buyer with written notice (the
"Notice") at least 30 days prior the date of an Advance. The Notice shall
specify the date the Company requires the Advance, the aggregate dollar
amount of the Advance, and a description of the specific purpose for which
the Advance shall be used (accompanied by such supporting information as
Buyer shall reasonably request); and
(b) Buyer shall not be obligated to make an Advance or arrange for a
Third Party Advance if, since the Closing Date, a Material Adverse Effect
has occurred with respect to the Company's financial condition or business
operations.
Section 10.04. COVENANTS OF COMPANY. The Company covenants and agrees
that Advances will be used only for the purposes set forth in the Notice and
will in no event be used to make any distributions, payments, loans or other
accommodations, to its Members; provided, however, that this provision shall not
be deemed to prohibit the payment of salaries, bonuses or reimbursable expenses
of the Company's employees under current or future employment agreements.
Section 10.05. TERM OF OBLIGATION. Buyer's obligations to provide
Advances shall commence on the Closing Date and continue until the second
anniversary thereafter (the "Initial Term"), subject to the extension and
earlier termination as hereinafter provided. The term of obligation shall be
automatically extended for additional terms of one year (each a "Renewal Term")
after the Initial Term and each Renewal Term, unless no later than 60 days prior
to the end of the Initial Term or any Renewal Term either party gives notice to
the other, in accordance with Article XII, that the term of the obligation shall
not be so extended. In no event shall Buyer be obligated to make Advances in
excess of the Maximum Amount taking into account all Advances made during the
Initial Term and any Renewal Term. In addition, Buyer's obligation to provide
Advances shall automatically terminate on the date Buyer ceases to own 51% or
more of the Percentage Interests.
Section 10.06. ADVANCES SUBJECT TO SETOFF. Notwithstanding the provisions
contained in Section 10.02 of this Agreement, in the event the Company or any
Selling Holder breaches any representation, warranty, covenant or agreement
contained in this Agreement or the Transaction Documents, and which breach
results in a Material Adverse Effect, in addition to and not in limitation of
any other rights or remedies Buyer may have under such agreements, Buyer shall
(i) no longer be required to make any further Advances until such breach is
cured to Buyer's reasonable satisfaction, and (ii) the Maximum Amount shall be
decreased by any damages Buyer reasonably believes it has incurred or suffered
as a result of such breach.
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ARTICLE XI
SURVIVAL; INDEMNIFICATION
Section 11.01. SURVIVAL. The covenants, agreements, representations and
warranties of the parties hereto contained in this Agreement or in any
certificate or other writing delivered pursuant hereto or in connection herewith
shall survive the Closing for a period of four years after the Closing Date;
provided that (a) the covenants, agreements, representations and warranties
contained in Section 6.03 shall survive for the period of time specified therein
and the covenants, agreements, representations and warranties contained in
Articles VII or VIII shall survive until expiration of the statute of
limitations applicable to the matters covered thereby (giving effect to any
waiver, mitigation or extension thereof). Notwithstanding the preceding
sentence, any covenant, agreement, representation or warranty in respect of
which indemnity may be sought under this Agreement shall survive the time at
which it would otherwise terminate pursuant to the preceding sentence, if notice
of the inaccuracy or breach thereof giving rise to such right of indemnity shall
have been given to the party against whom such indemnity may be sought prior to
such time.
Section 11.02. INDEMNIFICATION OBLIGATIONS.
(a) Indemnification by the Company and Selling Holders. The Company
and the Selling Holders (with the exception of Mr. Richard W. Vesel),
jointly and severally shall indemnify, defend and hold harmless Buyer, its
officers, directors and employees from, against and in respect of any and
all claims, damages, losses, deficiencies, liabilities, assessments,
judgments, costs, fees and expenses (including reasonable attorneys fees)
(collectively, "Damages") resulting from, relating to or arising out of (i)
any misrepresentation, inaccuracy in or breach of representations or
warranties; (ii) any failure to perform, satisfy, or observe or the non-
fulfillment of any agreement or covenant on the part of the Company or the
Selling Holders, (iii) any claim by any former or other equity interest
owner of the Company for any prior transaction involving any Percentage
Interest or other equity interest of the Company or any predecessor entity,
or (iv) any legal proceeding relating to any actual inaccuracy, breach or
failure, or liability referred to in clauses (i) through (iii) above. The
Selling Holders and the Company shall have no responsibility for Damages
claimed by Buyer until such claims exceed $50,000, in the aggregate, and
then shall be responsible for the first dollar of Damages claimed in excess
of $50,000.
(b) Indemnification by Buyer. Buyer shall indemnify, defend and hold
harmless the Company and the Selling Holders from, against and in respect
of any and all Damages resulting from, relating to or arising out of any
(i) misrepresentation, (ii) any failure to perform, satisfy, or observe or
the non-fulfillment of any agreement or covenant on the part of Buyer, or
(iii) any legal proceeding relating to any actual inaccuracy, breach or
failure, or liability referred to in clauses (i) through (ii) above. The
Buyer shall have no responsibility for Damages claimed by the Company or
the Selling Holders until such claims exceed $50,000, in the aggregate, and
then shall only be responsible for the first dollar of Damages claimed in
excess of $50,000.
(c) Each indemnifying party or parties hereto will indemnify and hold
harmless the indemnified party or parties hereto from, against and in
respect of any and all actions, suits, proceedings, demands, assessments,
judgments, costs (including attorneys' fees) and
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legal and other expenses incident to any of the foregoing or to the
enforcement of this Article XI.
Section 11.03. METHOD OF ASSERTING CLAIMS, ETC. All claims for
indemnification under this Article XI shall be asserted and resolved as follows:
(a) In the event that any claim or demand for which an indemnifying
party would be liable to an indemnified party hereunder is asserted against
or sought to be collected by a third party, the indemnified party shall:
(i) promptly notify the indemnifying party of such claim or demand,
specifying the nature of such claim or demand and the amount or the
estimated amount thereof to the extent then feasible (which estimate shall
not be conclusive of the final amount of such claim or demand) (the "Claim
Notice"); provided, however, that the failure of an indemnified party to
give notice as provided herein shall not relieve an indemnifying party of
its obligations under this Article XI; (ii) an indemnifying party shall
have 10 days from their receipt of the Claim Notice (the "Notice Period")
to notify the indemnified party (x) whether or not the indemnifying party
disputes its liability to the indemnified party hereunder with respect to
such claim or demand, and (y) if they do not dispute such liability,
whether or not they desire, at their sole cost and expense, to defend the
indemnified party against such claim or demand; provided, however, that the
indemnified party is hereby authorized prior to and during the Notice
Period to file any motion, answer or other pleading which it shall deem
necessary or appropriate to protect its interests; (iii) in the event that
the indemnifying party notifies the indemnified party within the Notice
Period that the indemnifying party does not dispute such liability and
desires to defend against such claim or demand, then except as hereinafter
provided, the indemnifying party shall have the right to defend by
appropriate proceedings, which proceedings shall be promptly settled or
prosecuted to a final conclusion in such a manner as to avoid any risk of
the indemnified party becoming subject to liability for any other matter;
(iv) if the indemnified party desires to participate in, but not control,
any such defense or settlement it may do so at its sole cost and expense;
provided, however, that the indemnifying party shall pay such expense if
representation of the indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential
differing interests between the indemnified party and any other party
represented by such counsel in such proceeding; (v) if, in the reasonable
opinion of the indemnified party, any such claim or demand involves an
issue or matter which could have a materially adverse effect on the
business, operations, assets, properties or prospects of the indemnified
party, or Affiliate of the indemnified party, the indemnified party shall
have the right to control the defense or settlement of any such claim or
demand, and its reasonable costs and expenses thereof shall be included as
part of the indemnification obligations of the indemnified party hereunder;
(vi) if the indemnifying party disputes the indemnifying party' liability
with respect to such claim or demand or elects not to defend against such
claim or demand, whether by not giving timely notice as provided above or
otherwise, then the amount of any such claim or demand, or, if the same be
contested by the indemnifying party or by the indemnified party (but the
indemnified party shall not have any obligation to contest any such claim
or demand), then that portion thereof as to which such defense is
unsuccessful, shall be conclusively deemed to be a liability of the
indemnifying party hereunder (subject, if the indemnifying party has timely
disputed liability, to a determination that the disputed liability is
covered by these indemnification provisions).
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(b) In the event the indemnified party should have a claim against the
indemnifying party hereunder which does not involve a claim or demand being
asserted against or sought to be collected from it by a third party, the
indemnified party shall promptly send a Claim Notice with respect to such
claim to the indemnifying party. If the indemnifying party does not notify
the indemnified party within the Notice Period that they dispute such
claim, the amount of such claim shall be conclusively deemed a liability of
the indemnifying party hereunder.
(c) Nothing herein shall be deemed to prevent any indemnified party
from making a claim hereunder for potential or contingent claims or demands
provided the Claim Notice sets forth the specific basis for any such
potential or contingent claim or demand and the estimated amount thereof to
the extent then feasible and the indemnified party has reasonable grounds
to believe that such a claim or demand will be made.
(d) Without limiting Buyer's rights, Buyer shall have the option of
recouping all or any part of its Damages after a final determination
thereof in accordance with subsection (e) of this Section in lieu of
seeking any cash indemnification therefor to which it is entitled under
this Article XI by notifying (i) any member of the Lucier Group that Buyer
is reducing or setting off any such amount against the outstanding
principal and interest under the Note issued by Buyer to such person, or
(ii) notifying the Company that it is reducing the Working Capital Line.
If Buyer elects to proceed under clause (i), this shall affect the timing
and amount of payments required under the Notes in the same manner as if
Buyer had made a permitted prepayment (without premium or penalty)
thereunder.
(e) A final determination of a disputed claim as to Damages shall be
(i) as to third party claims, a judgment of any court determining the
validity of a disputed claim, if no appeal is pending from such judgment
or if the time to appeal therefrom has elapsed, (ii) as between the
Company, the Selling Holders and/or the Buyer an award of any arbitration
determining the validity of such disputed claim; (iii) a written agreement
as to the termination of the dispute with respect to such claim signed by
all of the parties thereto or their attorneys, (iv) a written
acknowledgement of the indemnifying party that he or it no longer disputes
the validity of such claim, or (v) such other evidence of final
determination of a disputed claim as shall be acceptable to the parties.
(f) Arbitration. All disputes under this Article XI and all other
controversies or claims arising out of or relating to this Agreement, or
the breach thereof, shall be settled by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association in
Cleveland, Ohio. One arbitrator shall be selected by the indemnifying
party or parties, one arbitrator shall be selected by the indemnified
party, and the third arbitrator shall be chosen by the first two
arbitrators chosen. The cost and expense of arbitration shall be shared
equally by the parties to the arbitration, regardless of which party or
parties prevail. The arbitration shall be conducted in accordance with the
following time schedule unless otherwise mutually agreed to in writing by
the parties: (i) parties to the arbitration proceeding shall each appoint
their respective arbitrator within fifteen business days after the
occurrence of the event giving rise to arbitration; (ii) within five
business days thereafter, such arbitrators shall appoint the third
arbitrator; (iii) within ten business days after the appointment of the
third arbitrator, parties to the arbitration proceeding shall provide all
documents, records and
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supporting information reasonably necessary to resolve the dispute; and
(iv) within 15 business days after the date the above records are due, the
arbitrators shall render their decision The decision or award of the
arbitrators shall be final and binding upon the parties hereto to the same
extent and to the same degree as if the matter had been adjudicated by a
court of competent jurisdiction and shall be enforceable under the Federal
Arbitration Act.
Section 11.04. PAYMENT.
(a) In the event that any party is required to make any payment under
this Article XI, such party shall promptly pay the indemnified party the
amount so determined. If there should be a dispute as to the amount or
manner of determination of any indemnity obligation owed under this Article
XI, the party from which indemnification is due shall nevertheless pay when
due such portion, if any, of the obligation as shall not be subject to
dispute. The difference, if any, between the amount of the obligation
ultimately determined as properly payable under this Article XI and the
portion, if any, theretofore paid shall bear interest as provided in
Section 11.04(c). Upon the payment in full of any claim, either by setoff
or otherwise, the party or entity making payment shall be subrogated to the
rights of the indemnified party against any person, firm, corporation or
other entity with respect to the subject matter of such claim.
(b) The foregoing indemnification provisions are in addition to, and
not in derogation of, any statutory or common law remedy any party may have
for breach of representation, warranty, or covenant.
(c) If all or part of any indemnification obligation under this
Agreement is not paid when due, then the indemnifying party or parties
shall pay the indemnified party or parties interest on the unpaid amount of
the obligation for each day from the date the amount became due until
payment in full, payable on demand, at the fluctuating rate per annum which
at all times shall be the lowest rate of interest generally charged from
time to time by the Colorado National Bank and publicly announced by such
bank as its so-called "prime rate."
Section 11.05. SERVICE OF PROCESS. The Company and the Selling Holders
irrevocably consent to the service of any process, pleading, notices or other
papers by the mailing of copies thereof by registered, certified or first class
mail, postage prepaid, to the Company and the Selling Holders at such address
set forth in Section 12.02 herein, or by any other method provided or permitted
under Colorado law.
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Section 11.06. EQUITABLE RELIEF. In the event of a breach or threatened
breach by the Lucier Group, Terry V. Radl or Richard W. Vesel of Section 6.03
hereof regarding noncompetition and nonsolicitation, the Lucier Group, Terry V.
Radl or Richard W. Vesel hereby consent and agree that Buyer shall be entitled
to an injunction or similar equitable relief restraining the breaching party
from committing or continuing any such breach or threatened breach or granting
specific performance of any act required to be performed by the Lucier Group,
Terry V. Radl or Richard W. Vesel under any such provision, without the
necessity of showing any actual damage or that money damages would not afford an
adequate remedy and without the necessity of posting any bond or other security.
Nothing herein shall be construed as prohibiting Buyer, the Company or the
Selling Holders from pursuing any other remedies at law or in equity which it
may have.
ARTICLE XII
MISCELLANEOUS
Section 12.01. RELEASE OF THE COMPANY/SELLING HOLDERS.
(a) Release of the Company. The Selling Holders hereby release and
forever discharge the Company, and its respective Mangers, Members,
officers, employees, agents, successors and assigns from and against any
and all claims, demands, liabilities, obligations, damages, costs,
expenses, actions and causes of action, in law or in equity, known or
unknown, which the Selling Holders ever had or now have against the Company
as of the date hereof.
Notwithstanding the foregoing, the Selling Holders do not release the
Company from (i) claims directly resulting from the Company's willful
misconduct or fraud; (ii) covenants, obligations, or liabilities explicitly
set forth in the Agreement or sums or amounts owed by the Company to the
Selling Holders; (iii) indemnification obligations of the Company to the
Selling Holders or Buyer; (iv) the Company's obligations under any
agreement to which they are a party, which will remain in effect after the
Closing; or (v) Buyer's or the Selling Holders' rights under the Agreement
or any agreement or certificate delivered expressly pursuant thereto.
(b) Release of the Selling Holders. The company hereby releases and
forever discharges the Selling Holders from and against any and all claims,
demands, liabilities, obligations, damages, costs, expenses, actions and
causes of action, in law or in equity, known or unknown, which the Company
ever had or now has against the Selling Holders as of the date hereof.
Notwithstanding the foregoing, the Company does not release the
Selling Holders from (i) claims directly resulting from the Selling Holders
willful misconduct or fraud; (ii) covenants, obligations, or liabilities
explicitly set forth in the Agreement or sums or amounts owed by the
Selling Holders to the Company; (iii) indemnification obligations of the
Selling Holders to the Company or Buyer; (iv) the Selling Holders'
obligations under any agreement to which they are a party, which will
remain in effect after the Closing; or (v) Buyer's or the Company's rights
under the Agreement or any agreement or certificate delivered expressly
pursuant thereto.
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<PAGE>
Section 12.02. NOTICES. All notices, requests and other communications to
any party hereunder shall be in writing (including facsimile transmission) and
shall be deemed to have been given if delivered personally, mailed by certified
mail (return receipt requested) or sent by cable, telegram, telecopier or
recognized overnight delivery service to the parties at the following addresses
or at such other addresses as, specified by the parties by like notice:
If to Buyer: KFX Inc.
1999 Broadway, Suite 3200
Denver, CO 80202
Attention: Jeffrey A. Hansen
Fax: (303) 293-8430
With a copy to: Morrison & Foerster LLP
370 17th Street - Suite 5200
Denver, CO 80202
Attention: Warren L. Troupe, Esq.
Fax: (303) 592-1510
To the Company: Pegasus Technologies, Ltd.
1100 Mentor Avenue
Painesville, OH 44077
Attention: Brad J. Radl
Fax: (216) 357-1119
Tel: (216) 357-7794
With a copy to: Mandel, Lipton & Stevenson Limited
120 North LaSalle Street, Suite 2900
Chicago, IL 60602
Attention: Andres J. Gallegos
Fax: (312) 236-0781
Tel: (312) 236-7080
If to the Lucier Group: 2665 East Overlook Road
Cleveland Heights, OH 44106
Attention: P. Jeffrey Lucier
Fax: (216) 932-5706
Tel: (216) 321-0137
If to the Radl Group: Pegasus Technologies, Ltd.
1100 Mentor Avenue
Painesville, OH 44077
Attention: Brad J. Radl
Fax: (216) 357-1119
Tel: (216) 357-7794
Notice so given shall (in the case of notice so given by mail) be deemed given
and received (i) if by mail on the fourth calendar day after posting; (ii) if by
cable, telegram, telecopier, telex of personal delivery on the date of actual
transmission; and (as the case may be) personal or other delivery; and
32
<PAGE>
(iii) if by overnight courier, on the next business day following the day such
notice is delivered to the courier service.
Section 12.03. AMENDMENTS AND WAIVERS.
(a) Any provision of this Agreement may be amended or waived prior to
the Closing Date if, but only if, such amendment or waiver is in writing
and is signed, in the case of an amendment, by each party to this
Agreement, or in the case of a waiver, by the party against whom the waiver
is to be effective.
(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single
or partial exercise thereof preclude any other or further exercise thereof
or the exercise of any other right, power or privilege. The rights and
remedies herein provided shall be cumulative and not exclusive of any
rights or remedies provided by law.
Section 12.04. EXPENSES. Except as otherwise provided in this Agreement,
all costs and expenses incurred in connection with this Agreement shall be paid
by the Company including, but not limited to reasonable fees and expenses of
Buyer's counsel.
Section 12.05. SUCCESSORS AND ASSIGNS. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; provided that no party may assign, delegate
or otherwise transfer any of its rights or obligations under this Agreement
without the consent of each other party hereto. Any purported assignment in
violation of this Agreement shall be void.
Section 12.06. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the law of the State of Colorado, without regard to
the conflicts of law rules of such state.
Section 12.07. ENTIRE AGREEMENT. This Agreement, together with all
appendices, schedules and exhibits identified in this Agreement and that certain
Clarification Letter to the Amended and Restated Operating Agreement/Purchase
Agreement dated March 23, 1998 between the Company and KFx, constitutes the
entire agreement between the parties with respect to the subject matter of this
Agreement and supersedes all prior agreements and understandings, both oral and
written, between the parties with respect to the subject matter of this
Agreement. No representation, inducement, promise, understanding, condition or
warranty not set forth herein has been made or relied upon by either party
hereto. Neither this Agreement nor any provision hereof is intended to confer
upon any Person other than the parties hereto any rights or remedies hereunder.
Section 12.08. SPECIFIC PERFORMANCE. Each of the parties hereto agrees
that any breach by it of any provision of this Agreement would irreparably
injure the other party and that money damages would be an inadequate remedy
therefore. Accordingly, each of the parties hereto agrees that the other party
shall be entitled to one or more injunctions enjoining any such breach or
requiring specific performance of this Agreement and consents to the entry
thereof, this being in addition to any other remedy to which the non-breaching
party is entitled hereunder.
33
<PAGE>
Section 12.09. RELIANCE. The parties hereto agree that, notwithstanding
any right of any party to this Agreement to investigate the affairs of any other
party to this Agreement, the party having such right to investigate shall have
the right to rely fully upon the representations and warranties of the other
party expressly contained in this Agreement and the certificates expressly
delivered hereby.
Section 12.10. INTERPRETATION. The parties hereto acknowledge and agree
that: (a) each party and its counsel reviewed and negotiated the terms and
provisions of this Agreement except with respect to the schedules which are the
sole responsibility of the Company and Selling Holders (or certain of them) and
have contributed to its revision; (b) the rule of construction to the effect
that any ambiguities are resolved against the drafting party shall not be
employed in the interpretation of this Agreement; and (c) the terms and
provisions of this Agreement shall be construed fairly as to all parties hereto
and not in favor of or against any party, regardless of which party was
generally responsible for the preparation of this Agreement.
Section 12.11. COUNTERPARTS; THIRD PARTY BENEFICIARIES. This Agreement
may be signed in any number of counterparts, each of which shall be an original,
with the same effect as if the signatures thereto and hereto were upon the same
instrument. Signatures on this Agreement may be communicated by facsimile
transmission and shall be binding upon the parties transmitting the same by
facsimile transmission. Counterparts with original signatures shall be provided
within seven (7) days of the applicable facsimile transmission, provided,
however, that the failure to provide the original counterpart shall have no
effect on the validity or the binding nature of the Agreement. If executed in
counterparts, the Agreement shall be effective as if simultaneously executed.
No provision of this Agreement is intended to confer upon any Person other than
the parties hereto any rights or remedies hereunder.
34
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
PEGASUS TECHNOLOGIES, LTD., an Ohio
Limited Liability Company
By _______________________________________________
Brad J. Radl, President
KFX, INC., a Delaware corporation
By _______________________________________________
Theodore Venners, Chairman and Chief
Executive Officer
SELLING HOLDERS:
THE LUCIER GROUP
__________________________________________________
P. Jeffrey, Lucier, an individual
__________________________________________________
Craig W. Fraser, an individual
__________________________________________________
Alfred R. Lipton, an individual
THE RADL GROUP
__________________________________________________
Brad J. Radl, an individual
__________________________________________________
Philip A. Weintz, an individual
35
<PAGE>
__________________________________________________
Willie B. Roland, Jr., an individual
__________________________________________________
Terry V. Radl, an individual
__________________________________________________
Richard W. Vesel, an individual
36
<PAGE>
APPENDIX A
PEGASUS TECHNOLOGIES, LTD.-SELLING HOLDERS
<TABLE>
<CAPTION>
(A) (B) (C)
Name Percentage Interests Percentage Interest
--------------------
of Selling Holder Owned to be Sold
----------------- ----- ----------
<S> <C> <C>
LUCIER GROUP
P. Jeffrey Lucier 34.2% 34.2%
Craig W. Fraser 17.1% 17.1%
Alfred R. Lipton 5.7% 5.7%
---------------- ----- ----
Total Lucier Group 57.0% 57.0%
----- ----
RADL GROUP
Brad J. Radl 16.9% 1.81%
Phillip A. Weintz 8.0% .86%
Willie B. Roland, Jr. 1.4% .15%
Terry V. Radl 1.4% .15%
Richard W. Vesel (Economic
Selling Holder) .3% .03%
---------------------- ----- ----
Total Radl Group 28.0% 3.0%
----- ----
NON-SELLING SELLING HOLDER
AIW/P Holdings, Inc. 15.0% 0.0%
-------------------- ----- ----
Total 100.0% 60.0%
===== ====
</TABLE>
37
<PAGE>
APPENDIX B
PEGASUS TECHNOLOGIES, LTD.-SELLING HOLDERS
CASH CONSIDERATION
<TABLE>
<CAPTION>
(A) (B) (C)
Name
of Selling Holder Purchased Interest Cash Consideration/
----------------- ------------------ -------------------
Bonus
-----
<S> <C> <C>
LUCIER GROUP
P. Jeffrey Lucier 34.2% $ 540,000
Craig W. Fraser 17.1% $ 270,000
Alfred R. Lipton 5.7% $ 90,000
---------------------- ---- ----------
Total Lucier Group 57.0% $ 900,000
==== ==========
RADL GROUP
Brad J. Radl 1.81% $ 88,284
Philip A. Weintz .86% $ 62,907
Willie B. Roland, Jr. .15% $ 44,110
Terry V. Radl .15% $ 3,760
Richard W. Vesel (Economic
Selling Holder) .03% $ 939
---------------------- ---- ----------
Total Radl Group 3.0% $ 200,000
==== ==========
Total 60.0% $1,100,000
==== ==========
</TABLE>
38
<PAGE>
EXHIBIT 10.40
AMENDED AND RESTATED OPERATING
AGREEMENT OF PEGASUS TECHNOLOGIES
an Ohio Limited Liability Company
Effective as of March ____, 1998
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
<S> <C>
ARTICLE 1. DEFINITIONS
ARTICLE 2. FORMATION OF COMPANY
2.01 Formation
2.02 Name
2.03 Principal Place of Business
2.04 Registered Office and Registered Agent
2.05 Term
ARTICLE 3. BUSINESS OF COMPANY
ARTICLE 4. NAMES AND ADDRESSES OF MEMBERS
ARTICLE 5. RIGHTS AND DUTIES OF MANAGERS
5.01 Management
5.02 Number, Tenure and Qualifications
5.03 Powers of Managers
5.04 Members Have No Authority to Bind
5.05 Liability for Certain Acts
5.06 Managers Have No Exclusive Duty to Company
5.07 Bank Accounts
5.08 Indemnity of the Managers, Employees and Other Agents
5.09 Resignation
5.10 Removal
5.11 Vacancies
5.12 Salaries
5.13 Meetings
5.14 Place of Meetings
5.15 Notice of Meetings
5.16 Meeting of All Managers
5.17 Action by Managers Without A Meeting
5.18 Waiver of Notice
5.19 Telephonic Meetings
</TABLE>
<PAGE>
<TABLE>
<S> <C>
ARTICLE 5A. RIGHTS AND DUTIES OF MANAGEMENT TEAM
ARTICLE 6. RIGHTS AND OBLIGATIONS OF MEMBERS
6.01 Limitation of Liability
6.02 Company Debt Liability
6.03 List of Members
6.04 Matters Requiring Supermajority Vote
6.05 Company Books
6.06 Priority and Return of Capital
6.07 Liability of a Member to the Company
ARTICLE 7. MEETINGS OF MEMBERS
7.01 Meetings
7.02 Place of Meetings
7.03 Notice of Meeting
7.04 Meeting of All Members
7.05 Record Date
7.06 Quorum
7.07 Manner of Acting
7.08 Proxies
7.09 Action by Members Without a Meeting
7.10 Waiver of Notice
7.11 Telephonic Meetings
7.12 Budget and Business Plan
7.13 Mediation and Binding Arbitration
ARTICLE 8. CONTRIBUTIONS TO THE COMPANY AND CAPITAL ACCOUNTS
8.01 Members' Capital Contributions
8.02 Additional Contributions
8.03 Capital Accounts
8.04 Withdrawal or Reduction of Members' Contributions to
Capital
ARTICLE 9. ALLOCATIONS, INCOME TAX DISTRIBUTIONS,
ELECTIONS AND REPORTS
9.01 Allocation of Net Profits.
9.02 Allocation of Net Losses.
9.03 Treasury Regulation Allocations
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
9.04 Compliance with Code Section 704(b)
9.05 Minimum Cash Chargeback
9.06 Partner Recourse Liabilities
9.07 Qualified Income Offset
9.08 Curative Allocations
9.09 Section 754 Election
9.10 Distributions
9.11 Limitation Upon Distributions
9.12 Accounting Principles
9.13 No Interest on Return of Capital
9.14 Loans to Company
9.15 Accounting Period
9.16 Records, Audits and Reports
9.17 Returns and Other Elections
9.18 Tax Matters Member
ARTICLE 10. TRANSFERABILITY
10.01 General
10.02 Right of First Refusal
10.03 Transferee Not Member in Absence of Unanimous Consent
10.04 Purchase on Death
10.05 Earn-back Option
ARTICLE 11. ADDITIONAL MEMBERS
ARTICLE 12. DISSOLUTION AND TERMINATION
12.01 Dissolution
12.02 Winding Up, Liquidation and Distribution of Assets
12.03 Articles of Dissolution
12.04 Effect of Filing of Articles of Dissolution
12.05 Return of Contribution Nonrecourse to Other Members
ARTICLE 13. MISCELLANEOUS PROVISIONS
13.01 Notices
13.02 Books of Account and Records
13.03 Application of Ohio Law
13.04 Waiver of Action for Partition
13.05 Amendments
13.06 Execution of Additional Instruments
13.07 Construction
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
13.08 Headings
13.09 Waivers
13.10 Rights and Remedies Cumulative.
13.11 Severability
13.12 Heirs, Successors and Assigns
13.13 Creditors
13.14 Counterparts
13.15 Entire Agreement
13.16 Joint Preparation
13.17 Incorporation of Exhibits, etc.
EXHIBIT A List of Members, Managers & Management Committee
EXHIBIT B License & Service Agreement
</TABLE>
4
<PAGE>
ARTICLE I.
DEFINITIONS
THIS Operating Agreement is made and entered into as of March ___, 1998, by
and between the Members: KFx Inc., a Delaware Corporation, Brad J. Radl, Philip
A. Weintz, Willie B. Roland Jr., Terry V. Radl, and AIW/P Holdings, Inc., an
Ohio corporation and, Economic Interest Owner, Richard W. Vesel, whose
signatures appear on the signature page hereof.
WITNESSETH:
WHEREAS, Alfred R. Lipton filed Articles of Organization for Pegasus
Technologies, Limited with the Secretary of State of Ohio on July 17, 1996; and
WHEREAS, KFx Inc., a Delaware Corporation, has acquired the membership
interests of P. Jeffrey Lucier, Craig W. Fraser and Alfred R. Lipton and a
percentage of the membership interests of Brad J. Radl, Phillip A. Weintz,
Willie B. Roland Jr. and Terry V. Radl; and
WHEREAS, all of the existing members including AIW/P Holdings, Inc., an
Ohio Corporation, have approved by unanimous consent the sales and transfers to
KFx; and
WHEREAS, KFx Inc. as a new member and the existing members and Economic
Interest Owner desire to adopt an Amended and Restated Operating Agreement.
NOW THEREFORE, the parties agree as follows:
1.01 Definitions. The following terms used in this Amended and Restated
Operating Agreement shall have the following meanings:
(a) "Act" shall mean the Ohio Limited Liability Company Act, as
amended, Ohio Revised Code Chapter (S) 1705.
(b) "Articles of Organization" shall mean the Articles of
Organization of Pegasus as filed with the Secretary of State of Ohio, as amended
from time to time.
(c) "Book Value" shall mean, with respect to any asset of the
Company, such asset's adjusted basis for Federal income tax purposes, except as
follows:
(1) the initial Book Value of any assets contributed by a Member
to the Company shall be the gross fair market value of such assets at the
time of such contribution;
5
<PAGE>
(2) the Book Values of all of the Company's assets may be
adjusted by the Company to equal their respective gross fair market values,
as determined by the Managers as of the following times: (i) the admission
of a new Member to the Company or acquisition by an existing Member of an
additional Economic Interest in the Company; (ii) the distribution by the
Company of money or property to a retiring or continuing Member in
consideration for the retirement of all or a portion of such Member's
Membership Interest in the Company; (iii) the termination of the Company
for Federal income tax purposes pursuant to Section 708(b)(1)(B) of the
Code; and (iv) such other times as determined by the Members;
(3) determinations of fair market value for purposes of this
definition and other distributions of Company property shall be made in
accordance with Treasury Regulations Section 1.704-1(b)(2)(iv)(h); and
(4) the Book Value of a Company asset shall be adjusted for the
depreciation and amortization of such asset taken into account in computing
Net Profits and Net Losses and for Company expenditures and transactions
that increase or decrease the asset's Federal income tax basis.
(d) "Capital Account" as of any given date shall mean the Capital
Contribution to the Company by a Member as adjusted up to such date pursuant to
Article 8.
(e) "Capital Contribution" shall mean any contribution to the
capital of the Company in cash, property or services by a Member whenever made.
"Initial Capital Contribution" shall mean the initial contribution to the
capital of the Company pursuant to this Operating Agreement.
(f) "Code" shall mean the Internal Revenue Code of 1986, as amended,
or corresponding provisions of subsequent superseding federal revenue laws.
(g) "Company" shall refer to "Pegasus Technologies, Limited" or
"Pegasus".
(h) "Deficit Capital Account" shall mean with respect to any Member,
the deficit balance, if any, in such Member's Capital Account as of the end of
the taxable year, after giving effect to the following adjustments:
(1) credit to such Capital Account any amount which such Member
is obligated to restore under Section 1.704-1(b)(2)(ii)(c) of the Treasury
Regulations, as well as any addition thereto pursuant to the next to last
sentence of Sections 1.704-2 (g) (1) and (i) (5) of the Treasury
Regulations after taking into account thereunder any changes during such
year in partnership minimum gain (as determined in accordance with Section
1.704-2(d) of the Treasury Regulations) and in the minimum gain
attributable to
6
<PAGE>
any Member for a partner nonrecourse liability (as determined under Section
1.704-2(i)(3) of the Treasury Regulations); and
(2) debit to such Capital Account the items described in
Sections 1.704-1(b)(2)(ii) (d)(4), (5) and (6) of the Treasury Regulations.
This definition of Deficit Capital Account is intended to comply with the
requirements of the alternative test for economic effect contained in
Treasury Regulation Sections 1.704-1(b)(2)(ii)(d) and will be interpreted
consistently with those provisions.
(i) "Distributable Cash" shall mean all cash, revenues and funds
received by the Company from Company operations, less the sum of the following
to the extent paid or set aside by the Company: (i) all sums paid to lenders;
(ii) all cash expenditures incurred in the normal operation of the Company's
business; (iii) such Reserves as the Members holding at least 86% of the
Percentage Interests deem reasonably necessary for the proper operation of the
Company's business.
[(j) "Economic Interest" shall mean a Member's or Economic Interest
Owner's share of one or more of the Company's Net Profits, Net Losses and
distributions of the Company's assets pursuant to this Operating Agreement and
the Act, but shall not include any right to participate in the management or
affairs of the Company, including, the right to vote on, consent to or otherwise
participate in any decision of the Members or Managers.]
[(k) "Economic Interest Owner" shall mean the owner of an Economic
Interest who is not a Member.]
(l) "Entity" shall mean any general partnership, limited
partnership, limited liability company, corporation, joint venture, business
trust, cooperative, association, foreign trust or foreign business organization.
(m) "Gifting Member" shall mean any Member or [Economic Interest
Owner] who gifts bequeaths or otherwise transfers for no consideration (by
operation of law or otherwise, except with respect to bankruptcy) all or any
part of its Membership Interest [or Economic Interest.]
[(n) "Interest Holder" shall mean either a Member holding an Economic
Interest or an Economic Interest Owner.]
(o) "KFx" shall mean KFx Inc., a Delaware Corporation, with its
principal offices at 1999 Broadway, Denver, Colorado.
(p) "Majority Interest" shall mean Members holding Percentage
Interests, which, in the aggregate, exceed 50% of all Percentage Interests.
7
<PAGE>
(q) "Manager" shall mean one or more managers. References to the
Manager in the singular or as him, her, it, itself, or other like references
shall also, where the context so requires, be deemed to include the plural or
the masculine or feminine reference, as the case may be.
(r) "Member" shall mean each of the parties who executes a
counterpart of this Operating Agreement as a Member and each of the parties who
may hereafter become Members. To the extent a Manager has purchased a Membership
Interest he will have all the rights of a Member with respect to such Membership
Interest and the term "Member" as used herein shall include a Manager to the
extent he has purchased such Membership Interest. If a Person is a Member
immediately prior to the purchase or other acquisition by such Person of an
Economic Interest, such Person shall have all the rights of a Member with
respect to such purchased or otherwise acquired Membership Interest or Economic
Interest, as the case may be. A Person who only holds an Economic Interest shall
not be considered a Member.
(s) "Membership Interest" shall mean a Member's entire interest in
the Company excluding such Member's Economic Interest and the right to
participate in the management of the business and affairs of the Company,
including the right to vote on, consent to, or otherwise participate in any
decision or action of or by the Members granted pursuant to this Operating
Agreement and the Act.
(t) "Net Profits" and "Net Losses" shall mean the taxable income or
taxable loss of the Company for each fiscal year or relevant period, as
determined for Federal income tax purposes except as modified below, including,
without limitation, each item of Company income, gain, loss or deduction as
determined in accordance with the accrual method of accounting. Net Profits and
Net Losses shall also include income exempt from tax and described in Code
Section 705(a)(l)(B) and expenditures of the Company which are neither
deductible nor properly chargeable to the Capital Accounts under Section
705(a)(2)(B) of the Code (or treated as such expenditures), gain (or loss) on
the excess (deficit), if any, of the fair market value of distributed property
over (under) its Book Value, and the difference between the fair market value of
the Company's assets and their respective Book Values, adjusted in accordance
with the definition of Book Value. Depreciation, depletion, amortization, income
and gain (or loss) with respect to Company assets shall be computed with
reference to their Book Value rather than to their adjusted bases and in
accordance with Treasury Regulations Section 1.704-1(b)(1)(iv)(g)(3). To the
extent that Treasury Regulations Section 1.704-1(b)(2)(iv)(m) requires that any
adjustment to the tax basis of any Partnership property be taken into account in
determining Capital Accounts, the amount of such adjustment shall be included in
the Net Profits and Net Losses, as appropriate.
(u) "Operating Agreement" shall mean this Amended and Restated
Operating Agreement as originally executed and as amended from time to time.
8
<PAGE>
(v) "Percentage Interest" shall mean, for any Member, the percentage
interest in the Company as set forth on Exhibit A, as may be changed from time
to time.
(w) "Persons" shall mean any individual or Entity, and the heirs,
executors, administrators, legal representatives, successors, and assigns of
such "Person" where the context so permits.
(x) "Radl Group" shall mean collectively, Brad J. Radl, Philip A.
Weintz Willie B. Roland Jr. and Terry V. Radl, all Members of Pegasus. Richard
W. Vesel is an Economic Interest Owner associated with the Radl Group, but is
not a Member of Pegasus.
(y) "Reserves" shall mean funds set aside or amounts allocated to
reserves which shall be maintained in amounts deemed sufficient by the
affirmative vote of Members holding at least 86% of the Percentage Interests for
working capital and to pay taxes, insurance, debt service or other costs or
expenses incident to the ownership or operation of the Company's business.
(z) "Selling Member" shall mean any Interest Holder which sells,
assigns, pledges, hypothecates or otherwise transfers for consideration all or
any portion of its Membership Interest or Economic Interest.
(aa) "Tax Matter Partner" KFx shall initially serve as the "Tax
Matters Partner" as that term is defined in Section 6231 of the Code. The Tax
Matter Partner may sometimes be referred to herein as "Tax Matter Member."
(bb) "Transferring Member" shall collectively mean a Selling Member
and a Gifting Member.
(cc) "Treasury Regulations" shall mean the Federal income tax
regulations, including any temporary or proposed regulations, promulgated under
the Code, as such Treasury Regulations may be amended from time to time (it
being understood that all references herein to specific sections of the Treasury
Regulations shall be deemed also to refer to any corresponding provisions of
succeeding Treasury Regulations).
(dd) "Withdrawal Event" shall occur upon the death, retirement,
resignation, expulsion, bankruptcy or dissolution of a Member, or the occurrence
of any other event which terminates the continued membership of a Member in the
Company.
9
<PAGE>
ARTICLE 2.
FORMATION OF COMPANY
2.01 Formation. Pegasus has been organized as an Ohio Limited Liability
Company by executing and delivering Articles of Organization to the Ohio
Secretary of State in accordance with and pursuant to the Act.
2.02 Name. The name of the Company is Pegasus Technologies, Limited.
2.03 Principal Place of Business The principal place of business of the
Company within the State of Ohio shall be Painesville, Ohio. The Company may
locate its places of business and registered office at any other place or places
as the Managers may deem advisable.
2.04 Registered Office and Registered Agent. The Company's initial
registered office shall be at the office of its registered agent at 1100 Mentor
Avenue, Painesville, OH., 44077 and the name of its initial registered agent
shall be Brad J. Radl. The registered office and registered agent may be changed
by filing the address of the new registered office and/or the name of the new
registered agent with the Ohio Secretary of State pursuant to the Act.
2.05 Term. The term of the Company shall be 99 years from the date of
filing of Articles of Organization with the Ohio Secretary of State, unless the
Company is earlier dissolved in accordance with either the provisions of this
Operating Agreement or the Act.
ARTICLE 3.
BUSINESS OF COMPANY
The business of the Company shall be:
3.01 To develop, enhance, market sell and service computer software and
information technology for process control optimization, primarily but not
exclusively, in the public utility industry in the United States and selected
foreign markets, under the name "Pegasus Technologies, Limited".
3.02 To accomplish any lawful business whatsoever, or which shall at any
time appear conducive to or expedient for the protection or benefit of the
Company and its assets.
ARTICLE 4.
NAMES AND ADDRESSES OF MEMBERS
The names and addresses of the Members are as follows:
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<PAGE>
NAME ADDRESS
KFx Inc. 1999 Broadway, Suite 3200, Denver, CO., 80202
AIW/P Holdings, Inc. 3659 Green Road, Beachwood, Ohio 44122
Brad J. Radl 397 Manhattan Parkway, Painesville, Ohio 44077
Willie B. Roland Jr. 1126 Jackson Street, Wilkensburg, Pennsylvania 15221
Philip A. Weintz 5438 White Road, Geneva, Ohio 44041
Terry V. Radl 397 Manhattan Parkway, Painesville, Ohio 44077
ARTICLE 5.
RIGHTS AND DUTIES OF MANAGERS
5.01 Management. The Managers shall direct, manage and control the
business of the Company through the Management Team (Article 5A hereto). Except
for situations in which the approval of the Members is expressly required by
this Operating Agreement or by non-waivable provisions of the Act, the Managers
shall have full and complete authority, power and discretion to manage and
control the business, affairs and properties of the Company, to make all
decisions regarding those matters and to perform any and all other acts or
activities customary or incident to the management of the Company's business. No
one Manager may take any action permitted to be taken by the Managers, unless
otherwise specifically authorized, in writing, by the Managers.
5.02 Number, Tenure and Qualifications.
(a) The Company shall initially have five (5) Managers who are set
forth in Exhibit A. KFx shall appoint three (3) Managers, the Radl Group shall
appoint one (1) Manager and AIW/P Holdings, Inc. shall appoint one (1) manager.
(b) The number of Managers may otherwise be fixed from time to time
by the affirmative vote of Members holding at least 86% of the Percentage
Interests, but in no instance shall there be less than one Manager. Each Manager
shall hold office until his successor shall have been elected and qualified.
KFx, the Radl Group and AIW/P Holdings, Inc., shall each elect its respective
Managers, except as otherwise provided, in the manner as each shall determine.
Managers need not be Interest Holders of the Company.
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5.03 Certain Powers of Managers. Without limiting the generality of
Section 5.01, the Managers, by majority vote, shall have the power and
authority, on behalf of the Company:
(a) To acquire property from any Person as the Managers may
determine. whether or not such Person is directly or indirectly affiliated or
connected with any Manager or Member:
(b) Subject to the provisions of Section 6.04, cause the Company to
borrow money from such banks, or other lending institutions, the Managers,
Members, or affiliates of the Managers or Members on such terms as the Managers
deem appropriate, and in connection therewith, to hypothecate, encumber and
grant security interests in the assets of the Company to secure repayment of the
borrowed sums. No debt shall be contracted or liability incurred by or on behalf
of the Company except by the Managers or to the extent permitted under the Act,
by agents or employees of the Company expressly authorized to contract such debt
or incur such liability by the Managers;
(c) To purchase liability and other insurance to protect the
Company's property and business;
(d) To hold and own Company real and personal properties in the name
of the Company;
(e) Subject to the provisions of Section 6.04, to invest Company
funds in time deposits, short-term governmental obligations, commercial paper or
other investments;
(f) Subject to the provisions of Section 6.04, to sell or otherwise
dispose of all or substantially all of the assets of the Company as part of a
single transaction or plan as long as such disposition is not in violation of or
a cause of a default under any other agreement to which the Company may be
bound.
(g) To execute on behalf of the Company all instruments and
documents, including, without limitation, checks; drafts; notes and other
negotiable instruments; mortgages or deeds of trust; security agreements;
financing statements; documents providing for the acquisition, mortgage or
disposition of the Company's property; assignments, bills of sale; leases; and
any other instruments or documents necessary to the business of the Company.
(h) To employ accountants, legal counsel, managing agents or other
experts to perform services for the Company;
(i) Subject to the provisions of Section 6.04, to enter into any and
all other agreements on behalf of the Company, in such forms as the Managers may
approve; and
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(j) Subject to the provisions of Section 6.04, to do and perform all
other acts as may be necessary or appropriate to the conduct of the Company's
business.
5.04 Authority to Act. Unless authorized to do so by this Operating
Agreement or by the Managers of the Company, no attorney-in-fact, employee or
other agent of the Company shall have any power or authority to bind the Company
in any way, to pledge its credit or to render it liable for any purpose. No
Member shall have any power or authority to bind the Company unless the Member
has been authorized by the Managers to act as an agent of the Company in
accordance with the previous sentence.
5.05 Liability for Certain Acts. Each Manager shall perform his duties as
Manager in good faith, in a manner he reasonably believes to be in the best
interests of the Company, and with such care as an ordinarily prudent person in
a like position would use under similar circumstances. A Manager shall not be
liable to the Company or to any Member for any loss or damage sustained by the
Company or any Member, unless the loss or damage shall have been the result of
fraud, deceit, gross negligence, willful misconduct or a wrongful taking by the
Manager.
5.06 Managers Have No Exclusive Duty to Company. Except for those on the
Management Team (excluding Jeffrey A. Hansen), a Manager shall not be required
to manage the Company as his sole and exclusive function and he may have other
business interests and engage in activities in addition to those relating to the
Company. Neither the Company nor any Member shall have any right, by virtue of
this Operating Agreement, to share or participate in such other investments or
activities of the Managers or to the income or proceeds derived therefrom.
5.07 Bank Accounts. The Managers may from time to time open bank accounts
in the name of the Company. Two of the Managers shall be the signatory(ies)
thereon. All checks drafts, notes and other negotiable instruments which exceed
$10,000 shall require the signature of a representative of KFx and Brad J. Radl.
5.08 Indemnity of the Managers, Employees and Other Agents. Provided that
Members owning a Majority Interest approve, the Company shall, to the maximum
extent permitted under Section 1705.32 of the Act, indemnify and make advances
for expenses to Managers, employees and other agents.
5.09 Resignation. Any Manager may resign at any time by giving written
notice to the Members. The resignation of any Manager shall take effect upon
receipt of notice thereof or at such later date specified in such notice; and,
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective. The resignation of a Manager who is also a
Member shall not affect the Manager's rights as a Member and shall not
constitute a withdrawal of a Member.
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5.10 Removal. Subject to the provisions of Section 5.02, the Radl Group
and KFx shall, respectively, have the right to remove at any time, with cause,
any or all of its own appointed or elected Managers. The removal of a Manager
who is also a Member shall not affect the Manager's rights as a Member and shall
not constitute a withdrawal of a Member.
5.11 Vacancies. Any vacancy occurring for any reason in the number of
Managers may be filled by whichever group elected said Manager(s) and in such
manner as the respective group determines. Any Manager's position to be filled
by reason of an increase in the number of Managers shall be filled by the
election at a meeting of Members called for that purpose or by the Members'
unanimous written consent. A Manager elected to fill a vacancy shall be elected
for the unexpired term of his predecessor in office and shall hold office until
the expiration of such term and until his successor shall be elected and
qualified or until his earlier death, resignation or removal. A Manager chosen
to fill a position resulting from an increase in the number of Managers shall
hold office until his successor shall be elected and qualified, or until his
earlier death, resignation or removal.
5.12 Salaries. Other than those Managers serving on the Management Team,
no Manager shall receive a salary or other compensation unless otherwise
provided by the affirmative vote of Members holding at least 86% of all
Percentage Interests, in which case no such Manager shall be prevented from
receiving such salary because he is also a Member.
5.13 Meetings. Meetings of the Managers, for any purpose or purposes, may
be called by the Tax Matters Partner or by any Manager. Unless otherwise
provided for in this Operating Agreement, action to be taken by the Managers
shall be by simple majority vote of all the Managers.
5.14 Place of Meetings. A majority of the Managers may designate any
place, either within or outside the State of Ohio, as the place of meeting for
any meeting of the Managers. If no designation is made, or if a special meeting
be otherwise called, the place of meeting shall be the principal place of
business of the Company in the State of Ohio.
5.15 Notice of Meetings. Except as otherwise provided in this Agreement,
written notice stating the place, day and hour of the meeting and the purpose or
purposes for which the meeting is called shall be delivered not less than
fifteen (15) nor more than thirty (30) days before the date of the meeting,
either personally or by mail, by or at the direction of the Tax Matters Partner
or Manager calling the meeting, to each Manager entitled to vote at such
meeting. If mailed, such notice shall be deemed to be delivered two calendar
days after being deposited in the United States mail, addressed to the Manager
at his or her address as it appears on the books of the Company, with postage
thereon prepaid.
5.16 Meeting of All Managers. If all of the Managers shall meet at any
time and place, either within or outside of the State of Ohio, and consent to
the holding of a meeting at such time
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and place, such meeting shall be valid without call or notice, and at such
meeting lawful action may be taken.
5.17 Action by Managers Without a Meeting. Action required or permitted
to be at a of meeting may be taken without a meeting if the action is evidenced
by one or more written consents describing the action taken, signed by each
Manager entitled to vote and delivered to the Tax Matters Partner for inclusion
in the minutes or for filing with the Company records. Action taken under this
Section is effective when all Managers entitled to vote have signed the consent,
unless the consent specifies a different effective date.
5.18 Waiver of Notice. When any notice is required to be given to any
Manager, a waiver thereof in writing signed by the person entitled to such
notice, whether before, at, or after the time stated therein, shall be
equivalent to the giving of such notice.
5.19 Telephonic Meetings. A Manager may participate in a meeting of
Managers by means of conference telephone or similar communications equipment
(to include electronic communication), enabling all Managers participating in
the meeting to communicate with one another. Participation in a meeting pursuant
to this section shall constitute presence in person at such meeting.
ARTICLE 5A.
RIGHTS AND OBLIGATIONS OF MANAGEMENT TEAM
5A.01 Management Team. The daily business and affairs of the Company shall
be managed by its Management Team (the "Team"). The Managers by a majority vote,
may increase or decrease the number of persons on the Management Team. The Team
shall initially consist of:
Brad J. Radl - President
Philip A. Weintz - Vice President/Engineering
Willie B. Roland Jr. - Vice President/Sales and Marketing
Jeffrey A. Hansen - Vice President/Finance
The Team will manage and control the daily business of the Company. Except for
situations in which the approval of the Managers or Members is expressly
required by this Agreement or by non-waivable provisions of the Act, the Team
shall have full and complete authority, power and discretion to manage the
ordinary day-to-day business, affairs and properties of the Company, to make
decisions regarding those matters and to perform any and all other
administrative or ministerial acts or activities customary, or incident to the
daily management of the Company's business.
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5A.02 Powers of the Management Team. The Team shall have power and
authority, within the parameters of the budget and the annual business plan
(specifically the operating guidelines) adopted by the Members at the annual
meeting, on behalf of the Company:
(a) To execute the following instruments and documents, including:
checks, drafts; other negotiable instruments; financing statements; bills of
sale; contracts and any other instruments or documents necessary to the conduct
of the daily business of the Company.
(b) To enter into any and all other agreements on behalf of the
Company, in such forms as the Managers may approve; and
(c) To do and perform all other administrative acts as may be
necessary or appropriate to the conduct of the Company's business.
ARTICLE 6.
RIGHTS AND OBLIGATIONS OF MEMBERS
6.01 Limitation of Liability. Each Member's liability shall be limited as
set forth in this Operating Agreement, the Act and other applicable law.
6.02 Company Debt Liability. Except as provided in Sections 6.07 and 8.02
or as otherwise required by law, no Member shall be liable under a judgment,
decree or order of the court or in any other manner for a debt obligation or
liability of the Company.
6.03 List of Members. Upon the written request of any Member, the
Managers shall provide a list showing the names, addresses and Membership
Interests and Economic Interests of all Members.
6.04 Matters Requiring Supermajority Vote.
(a) The following matters require the affirmative vote of Members holding
at least 86% of the Percentage Interests:
(1) Sell or otherwise dispose of all or substantially all of the
assets of the Company as part of a single transaction or plan;
(2) Merge or consolidate the Company with a third party entity
or accept new Members or Economic Interest Owners;
(3) Approve performance incentives, bonus plans or other
employee compensation plans and Manager salaries;
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(4) Amend this Amended and Restated Operating Agreement.
(5) Establish budgets, approve annual business plans or require
Members or Economic Interest Holders to make additional capital contributions
provided that in the event of non-approval of the annual budget and/or business
plan, the budget and/or business plan for the previous year shall continue to
apply until replaced.
(6) Fix the number of Managers;
(7) Dissolve the Company; or
(8) Remove the Management Team.
6.05 Company Books. The Managers shall maintain and preserve and during
the term of the Company, the accounts, books, and other relevant Company
documents described in Section 9.16. Upon reasonable written request, each
Member and Economic Interest Owner shall have the right, at a time during
ordinary business hours, as reasonably determined by the Managers, to inspect
and copy, at the requesting Interest Holder's expense the Company documents
identified in Section 1705.28 of the Act, and such other documents which the
Managers deem appropriate.
6.06 Priority and Return of Capital. Except for the provisions in Article
9 hereof, no Interest Holder shall have priority over any other Interest Holder,
either as to the return of Capital Contributions or as to Net Profits, Net
Losses or distributions; provided that this Section shall not apply to loans
which a Member has made to the Company.
6.07 Liability of a Member to the Company. A Member who receives a
distribution or the return in whole or in part of its contribution is liable to
the Company only to the extent provided by the Act.
ARTICLE 7.
MEETINGS OF MEMBERS
7.01 Meetings. A meeting of the Members shall occur annually, during the
month of November at a date to be set by a Majority Vote of the Managers.
Additional meetings of the Members, for any purpose or purposes may be called by
any Manager or by any Member or Members holding at least 25% of the Percentage
Interests.
7.02 Place of Meetings. The Members may designate any place, either within
or outside the State of Ohio, as the place of meeting for any meeting of the
Members. If no designation is made, or if a special meeting be otherwise called,
the place of meeting shall be the principal place of business of the Company in
the State of Ohio.
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7.03 Notice of Meetings. Except as provided in Section 7.04, written
notice stating the place, day and hour of the meeting and the purpose or
purposes for which the meeting is called shall be delivered not less than
fifteen (15) nor more than thirty (30) days before the date of the meeting,
either personally or by mail, by or at the direction of the Managers or Member
or Members calling the meeting, to each Member entitled to vote at such meeting.
If mailed, such notice shall be deemed to be delivered two calendar days after
being deposited in the United States mail, addressed to the Member at its
address as it appears on the books of the Company, with postage thereon prepaid.
7.04 Meeting of All Members. If all of the Members shall meet at any time
and place either within or outside of the State of Ohio, and consent to the
holding of a meeting at such time and place, such meeting shall be valid without
call or notice, and at such meeting lawful action may be taken.
7.05 Record Date. For the purpose of determining Members entitled to
notice of or to vote at any meeting of Members or any adjournment thereof, or
Members entitled to receive payment of any distribution, or in order to make a
determination of Members for any other purpose, the date on which notice of the
meeting is mailed or the date on which the resolution declaring such
distribution is adopted, as the case may be, shall be the record date for such
determination of Members. When a determination of Members entitled to vote at
any meeting of Members has been made as provided in this Section, such
determination shall apply to any adjournment thereof.
7.06 Quorum. Members holding at least fifty percent of all Percentage
Interests, represented in person or by proxy, shall constitute a quorum at any
meeting of Members; however, there must be a member from KFx Inc. In the absence
of a quorum at any such meeting, a majority of the Percentage Interests so
represented may adjourn the meeting from time to time for a period not to exceed
sixty days without further notice. However, if the adjournment is for more than
sixty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
Member of record entitled to vote at the meeting. At such adjourned meeting at
which a quorum shall be present or represented, any business may be transacted
which might have been transacted at the meeting as originally noticed. The
Members present at a duly organized meeting may continue to transact business
until adjournment, notwithstanding the withdrawal during such meeting of that
number of Percentage Interests whose absence would cause loss of a quorum.
7.07 Manner of Acting. If a quorum is present, the affirmative vote of
Members holding a Majority Interest shall be the act of the Members, unless the
vote of a greater or lesser proportion or number is otherwise required by the
Act, by the Articles of Organization, or by the Operating Agreement. Unless
otherwise expressly provided herein or required under applicable law, only
Members who have a Membership Interest may vote or consent upon any matter and
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their vote or consent, as the case may be, shall be counted in the determination
of whether the matter was approved by the Members.
7.08 Proxies. At all meetings of Members, a Member may vote in person or
by proxy executed in writing by the Member or by a duly authorized attorney-in-
fact. Such proxy shall be filed with the Managers of the Company before or at
the time of the meeting. No proxy shall be valid after eleven months from the
date of its execution, unless otherwise provided in the proxy.
7.09 Action by Members Without a Meeting. Action required or permitted to
be taken at a meeting of Members may be taken without a meeting if the action is
evidenced by one or more written consents describing the action taken, signed by
each Member entitled to vote and delivered to the Managers of the Company for
inclusion in the minutes or for filing with the Company records. Action taken
under this Section is effective when all Members entitled to vote have signed
the consent, unless the consent specifies a different effective date.
7.10 Waiver of Notice. When any notice is required to be given to any
Member, a waiver thereof in writing signed by the person entitled to such
notice, whether before, at, or after the time stated therein, shall be
equivalent to the giving of such notice.
7.11 Telephonic Meetings. A Member may participate in a meeting of
Members by means of conference telephone or similar communications equipment
enabling all Members participating in the meeting to hear one another.
Participation in a meeting pursuant to this section shall constitute presence in
person at such meeting.
7.12 Budget and Business Plan. At least thirty (30) days prior to the
annual meeting, which shall occur during the month of November, KFx (for so long
as KFx owns a Majority Interest in the Company) shall submit to the other
Members a business plan and budget for the upcoming year for the approval of the
Members at the annual meeting. If such budget and or business plan is not
approved in accordance with Section 6:04, then such budget and or business plan,
at the request of any Member, shall be subject to Section 7:13 hereof.
7.13 Mediation. In the event disputes arise between the Members and the
Company, or between the Members, which in any way relate to this Amended and
Restated Operating Agreement, and such disputes cannot be resolved amicably, the
Members agree to first submit the dispute to resolution before a professional
mediator. Said mediator shall be as agreed upon by the Members. Such mediation
shall be a condition precedent to litigation except where the Members are unable
to agree on a professional mediator.
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ARTICLE 8.
CONTRIBUTIONS TO THE COMPANY AND CAPITAL ACCOUNTS
8.01 Members' Capital Contributions. The Initial Capital Contribution of
KFx is $2,200,000. The Capital Contribution of the Radl Group and Richard W.
Vesel was in the form of management services and the Capital Contribution of
AIW/P Holdings, Inc. was the granting of an exclusive license.
8.02 Additional Contributions. A Member or Economic Interest Owner shall
be required to make such additional Capital Contributions ("Additional Capital
Contributions") in the form and amount as shall be determined by the affirmative
vote of Members holding at least 86% of the Percentage Interests, from time to
time to be reasonably necessary to meet the expenses and obligations of the
Company (a "Shortfall").
(a) After the making of any such determination, the Managers shall give
written notice to each Member and Economic Interest Owner of the amount of the
required Additional Contribution, if any, and each Member and Economic Interest
Owner shall deliver to the Company its pro rata share thereof, (in proportion to
the respective Percentage Interest of the Member and Economic Interest Owner on
the date such notice is given or in such proportion as the Member Groups
otherwise determine) no later than thirty (30) days following the date such
notice is given.
(b) In the event any Member fails to make any Additional Capital
Contribution within the time specified (a "Non-Contributing Member"), the other
Members or any of them (the "Contributing Members") shall have the option to
contribute directly to the Company the funds required of the Non-Contributing
Member. If there is more than one Contributing Member each Contributing Member
shall pay that portion of the funds required of the Non-Contributing Member pro
rata based on that Member's Percentage Interest to the aggregate Percentage
Interests of the other Contributing Members, as determined prior to the request
for Additional Capital Contributions.
(c) Failure to Receive Shortfall. In the event Additional Capital
Contributions are insufficient to satisfy the Shortfall, the project or action
for which the Shortfall was requested will either (i) not be taken, or (ii) the
Company shall enter into an arrangement with other Members or third parties to
meet the total Shortfall requested; provided, however, that should the Managers
elect to proceed under clause (ii), the Members must approve such decision in
accordance with the terms of this Operating Agreement.
(d) Adjustment to Capital Accounts. Upon receipt of such Additional
Capital Contributions, the Capital Accounts and Percentage Interests of each
Member shall be adjusted to reflect such additional contributions.
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(e) None of the terms, covenants, obligations or rights contained in this
Section 8.02 is or shall be deemed to be for the benefit of any person or entity
other than the Members and the Company, and no such third person shall under any
circumstances have any right to compel any actions or payments by the Managers
and/or the Members.
8.03 Capital Accounts.
(a) A separate Capital Account will be maintained for each Member and
Economic Interest Owner. The Capital Account will be increased by (1) the
amount of money contributed by such Member or Economic Interest Owner to the
Company; (2) the fair market value of property contributed by such Member or
Economic Interest Owner to the Company (net of liabilities secured by such
contributed property that the Company is considered to assume or take subject
to under Code Section 752); and (3) allocations to such Member or Economic
Interest Owner of Net Profits and any other items of income or gain. Each
Member's or Economic Interest Owner's Capital Account will be decreased by (1)
the amount of money distributed to such Member or Economic Interest Owner by
the Company; (2) the fair market value of property distributed to such Member
or Economic Interest Owner by the Company (net of liabilities secured by such
distributed property that such Member or Economic Interest Owner is considered
to assume or take subject to under Code Section 752); and (3) allocations to
such Member or Economic Interest Owner of Net Losses and any other items of
loss or deduction.
(b) In the event of a permitted sale or exchange of a Membership
Interest or an Economic Interest in the Company, the Capital Account of the
transferor shall become the Capital Account of the transferee to the extent it
relates to the transferred Membership Interest or Economic Interest in
accordance with Section 1.704-1 (b)(2)(iv) of the Treasury Regulations.
(c) The manner in which Capital Accounts are to be maintained
pursuant to this Section 8.03 is intended to comply with the requirements of
Code Section 704(b) and the Treasury Regulations promulgated thereunder. If the
Company determines that the manner in which Capital Accounts are to be
maintained pursuant to the preceding provisions of this Section 8.03 should be
modified in order to comply with Code Section 704(b) and the Treasury
Regulations, then notwithstanding anything to the contrary contained in the
preceding provisions of this Section 8.03, the method in which Capital Accounts
are maintained shall be so modified, provided, however, that any change in the
manner of maintaining Capital Accounts shall not materially alter the economic
agreement between or among the Members or the Economic Interest Owner as set
forth in the Operating Agreement.
(d) Upon liquidation of the Company (or any Member's Membership
Interest or Economic Interest Owner's Economic Interest), liquidating
distributions will be made in accordance with the positive Capital Account
balances of the Members and Economic Interest Owner, as determined after taking
into account all Capital Account adjustments for the
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Company's taxable year during which the liquidation occurs. Liquidation proceeds
will be paid within sixty days of the end of the taxable year (or, if later,
within one hundred twenty days after the date of the liquidation). The Company
may offset damages for breach of this Operating Agreement by an Interest Holder
whose interest is liquidated (either upon the withdrawal of the Member or the
liquidation of the Company) against the amount otherwise distributable to such
Member.
(e) Except as otherwise required in the Act (and subject to Sections
8.01 and 8.02), no Interest Holder shall have any liability to restore all or
any portion of a deficit balance in such Interest Holder's Capital Account.
8.04 Withdrawal or Reduction of Members' Contributions to Capital:
(a) Except as otherwise provided in Section 9.13, a Member shall not
receive out of the Company's property any part of its Capital Contribution until
all liabilities of the Company have been paid or there remains property of the
Company sufficient to pay them.
(b) A Member, irrespective of the nature of its Capital Contribution,
has only the right to demand and receive cash in return for its Capital
Contribution.
ARTICLE 9.
ALLOCATIONS, INCOME TAX, DISTRIBUTIONS, ELECTIONS AND
REPORTS
9.01 Allocation of Net Profits. Net Profits shall first be allocated in
proportion to, and to the extent of, the excess of prior allocations of Net
Losses under Section 9.02 below over prior allocation of Net Profits under this
Section 9.01 and, second, any remaining Net Profits shall be allocated among the
Members in proportion to their Percentage Interests.
9.02 Allocation of Net Losses. Net Losses shall first be allocated among
the Members in proportion to and to the extent of the positive balances in their
respective Capital Accounts and, second, any remaining Net Losses shall be
allocated among the Members in proportion to their Percentage Interests.
9.03 Treasury Regulation Allocations. When the Book Value of a
Company asset differs from its basis for Federal or other income tax purposes,
solely for purposes of the relevant tax and not for purposes of computing
Capital Account balances, income, gain, loss, deduction and credit shall be
allocated among the Members under the remedial allocation method under Treasury
Regulations Section 1.704-3(d).
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9.04 Compliance with Code Section 704(b). Notwithstanding the foregoing,
if the amount of Net Losses that would otherwise be allocated to a Member would
cause or increase a Deficit Capital Account balance in such member's Capital
Account (an "Excess Deficit"), Net Losses equal to the amount thereof that would
cause or increase such Excess Deficit shall instead be allocated to the Members
to whom such Net Losses can be allocated without causing or increasing an Excess
Deficit.
9.05 Minimum Gain Chargeback. In any Fiscal Year in which the Company has
"partnership minimum gain" (as determined under Treasury Regulations Section
1.704-2(d) or minimum gain attributable to any "partner nonrecourse liabilities"
(as determined under Treasury Regulations Section 1.704-2(i)), the provisions of
Treasury Regulations Section 1.704-2(f), (g) and (i) regarding chargebacks of
partnership minimum gain and minimum gain attributable to partner nonrecourse
liabilities shall apply.
9.06 Partner Nonrecourse Liabilities. All deductions, losses and Code
Section 705(a)(2)(b) expenditures of the Company, as the case may be (all
computed for "book" purposes), that are treated under Section 1.704-2(i) of the
Treasury Regulations as deductions, losses, and expenditures attributable to
"partner recourse liabilities" of the Company shall be allocated to the Members
bearing the risk of loss with respect to such liabilities in accordance with
such Treasury Regulations.
9.07 Qualified Income Offset. If any Member unexpectedly receives an
adjustment allocation or distribution described in subparagraph (4), (5) or (6)
of Section 1.704-1(b)(ii)(d) of the Treasury Regulations, which adjustment,
allocation or distribution creates or increases an Excess Deficit in such
Member's Capital Account, then such Member shall be allocated items of "book"
income and gain in an amount and manner sufficient to eliminate or to reduce, as
quickly as possible, the Excess Deficit so created or increased. For purposes of
this Section 9.07, Capital Accounts shall be adjusted hypothetically as provided
for in Section 1.704-1(b)(2)(ii)(d) of the Treasury Regulations. The Members
intend that the provisions set forth in this Section 9.07 shall constitute a
"qualified income offset" as described in Section 1.704-1(b)(2)(ii)(d) of the
Treasury Regulations. Such provision of the Treasury Regulation shall control in
the case of any conflict between that provision of the Treasury Regulations and
this Section 9.07.
9.08 Curative Allocations. To the extent necessary to avoid any economic
distortions which may result from application of the Regulatory Allocations,
items of income, gain, loss, expense and deduction shall be allocated as
appropriate in the reasonable discretion of the Managers in order to remedy any
economic distortions that the Regulatory Allocations might otherwise cause, for
purposes hereof, "Regulatory Allocations" shall mean the allocations provided
under Sections 9.03 through 9.07.
9.09 Section 754 Election. At the request of any Member, the Managers
shall file an election on behalf of the Company pursuant to Section 754 of the
Code to adjust the basis of Company property in the case of a transfer of a
Partnership Interest.
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9.10 Distributions. A Member has no right to demand and receive any
distribution in a form other than cash. All distributions of cash or other
property shall be made to the Members pro rata in proportion to the respective
Percentage Interests of the Members on the record date of such distribution.
Except as provided in Section 9.11, all distributions of Distributable Cash and
property shall be made at such time as determined by the Mangers. All amounts
withheld pursuant to the Code or any provisions of state or local tax law with
respect to any payment or distribution to the Members from the Company shall be
treated as amounts distributed to the relevant Member or Members pursuant to
this Section 9.08.
9.11 Limitation upon Distributions.
(a) No distributions, priority or otherwise, or return of
contributions be made and paid if, after the distribution or return of
distribution is made either
(1) the Company would be insolvent (using a fair market value
analysis);
(2) the net book or, alternatively, fair market value of the
assets less the liabilities of the Company would be less than zero; or
(3) the Company's Reserves would be reduced below such amount
as the Managers may from time to time establish (pursuant to the affirmative
vote of 86% of the Members).
(b) The Managers may base a determination that a distribution or
return of contribution may be made under Section 9.11 in good faith reliance
upon a balance sheet and profit and loss statement of the Company represented to
be correct by the person having charge of its books of account, or certified by
an independent public or public accountant or firm of accountants to fairly
reflect the financial condition of the Company.
9.12 Accounting Principles. The profits and losses of the Company shall be
determined in accordance with generally accepted accounting principles applied
on a consistent basis using the cash method of accounting.
9.13 No Interest on Return of Capital. No Member or group shall be
entitled to interest on, or a return of, its Capital Contribution.
9.14 Loans to Company. Nothing in this Operating Agreement shall prevent
any Member from making secured or other loans to the Company by agreement with
the Company.
9.15 Accounting Period. The Company's accounting period shall be the
calendar year ("Fiscal Year").
24
<PAGE>
9.16 Records, Audits and Reports. At the expense of the Company, the
Managers shall maintain records and accounts of the operations and expenditures
of the Company. The members expressly acknowledge and consent to the terms of
that certain Administrative Services Agreement between the Company and KFx dated
of even date herewith, whereby KFx has agreed to provide certain accounting,
bookkeeping and other administrative services to the Company in accordance with
the terms and provisions contained in such agreement. At a minimum the Company
shall keep at its principal place of business the following records:
(a) A current list of the full name and last known address of each
Member and Economic Interest Owner setting forth the amount of cash each Member
and Economic Interest Owner has contributed a description and statement of the
agreed value of the other property or services each Member and Economic Interest
Owner has contributed or has agreed to contribute in the future, and the date on
which each became an Interest Holder;
(b) A copy of the Articles of Organization of the Company and all
amendments thereto, together with executed copies of any powers of attorney
pursuant to which any amendment has been executed;
(c) Copies of the Company's federal, state, and local income tax
returns and reports, if any, for the three most recent years;
(d) Copies of the Company's currently effective written Operating
Agreement, and copies of any financial statements of the Company for the three
most recent years;
(e) Minutes of every meeting;
(f) Any written consents obtained from Members for actions taken by
Members without a meeting; and
(g) Unless contained in the Articles of Organization or the
Operating Agreement, a writing prepared by the Managers setting out the
following:
(1) The times at which or events on the happening of which any
additional contributions agreed to be made by each Member and Economic Interest
Owner are to be made.
(2) Any right of an Interest Holder to receive distributions that
include a return of all or any part of the Interest Holder's contributions.
(3) Any power of an Interest Holder to grant the right to become an
assignee of any part of the Interest Holder's interest, and the terms and
conditions of the power.
25
<PAGE>
9.17 Returns and other Elections. The Managers shall cause the preparation
and timely filing of all tax returns required to be filed by the Company
pursuant to the Code and all other tax returns deemed necessary and required in
each jurisdiction in which the Company does business. Copies of such returns, or
pertinent information therefrom, shall be furnished to the Members within a
reasonable time after the end of the Company's year upon the Members' written
request. All elections permitted to be made by the Company under federal or
state laws shall be made by the Managers in their sole discretion, provided that
the Managers make any tax election requested by Members owning a Majority
Interest.
9.18 Tax Matters Member. KFx Inc. is designated the "Tax Matters Member"
or "Tax Matters Partner" (as defined in Code Section 6231), and is authorized
and required to represent the Company (at the Company's expense) in Connection
with all examinations of the Company's affairs by tax authorities including,
without limitation, administrative and judicial proceedings, and to expend
Company funds for professional services and costs associated therewith. The
Members agree to cooperate with each other and to do or refrain from doing any
and all things reasonably required to conduct such proceedings. The Tax Matters
member may be changed by the majority vote of Managers.
ARTICLE 10.
TRANSFERABILITY
10.01 General. Except as otherwise specifically provided herein, no
Interest Holder shall have the right, as to all or any part of its Membership
Interest or Economic Interest to:
(a) Sell, assign pledge, hypothecate, transfer, exchange or
otherwise transfer for consideration, (collectively, "sell"); or
(b) Gift, bequeath or otherwise transfer for no consideration
(whether or not by operation of law, except in the case of bankruptcy).
10.02 Right of First Refusal.
(a) Subject to the Radl Group's Earn-Back Option as set forth in
section 10.05, each Member may sell their Membership Interests to other Members.
Richard W. Vesel may sell his Economic Interest to other Members.
(b) If a Selling Member desires to sell all or any portion of its
Membership Interest or Economic Interest in the Company to a third party
purchaser, the selling Member shall obtain from such third party purchaser a
bona fide written offer to purchase such interest, stating the terms and
conditions upon which the purchase is to be made and the consideration offered.
The selling Member shall give written notification to the remaining Members, by
certified mail or personal delivery, of its intention to so transfer such
interest.
26
<PAGE>
(c) Primary Option to Purchase. Within 35 days after the receipt of
the notice of intention to transfer a Percentage Interest (as set forth in
Section 13.01) each remaining Member may exercise an option to purchase that
proportion of the Percentage Interest proposed to be transferred which equals
the proportion which the Percentage Interest owned by such remaining Member at
the time of his receipt of the notice is of the total of the Percentage
Interests then owned by all the remaining Members. The purchase option granted
in this paragraph is herein referred to as the "Primary Option."
(d) Secondary Option to Purchase. If a Member fails to exercise a
Primary Option granted to him to purchase the Percentage Interest proposed to be
transferred, each remaining Member who is granted and who exercises a Primary
Option may, within ten days after the expiration of the 35-day option period
provided for above, exercise an option to purchase the Percentage Interest with
respect to which such Member has failed to exercise his Primary Option
(hereinafter "the Option Interest"). In the case of a single remaining Member,
his option shall be to purchase all of the Option Interest. In the case of two
or more remaining Members, each such remaining Member's option shall be to
purchase the portion of Option Interest which bears the same proportion to the
total Option Interest as the Percentage Interest owned by each such remaining
Member at the time of receipt of the notice provided for above bears to the
total Percentage Interest then owned by all such remaining Members; provided
that all such remaining Members may, by agreement among themselves, determine
the proportions in which some or all of their number may exercise the option
granted in this paragraph. The purchase option granted by this paragraph is
referred to a the "Secondary Option."
(e) In the event the remaining Members (or any one or more of the
Members) give written notice to the selling Member of their desire to exercise
this right of first refusal and to purchase all of the selling Member's interest
in the Company which the selling Member desires to sell upon the same terms and
conditions as are stated in the aforesaid written offer to purchase, the
remaining Members shall have the right to designate the time, date and place of
closing, provided that the date of closing shall be within sixty days after
written notification to the Selling Member of the remaining Member or Members'
election to exercise their right of the first refusal.
(f) As a condition to the Company recognizing the effectiveness of
either the purchase of the Selling Member's interest in the Company by a third
party purchaser or the gift of an interest in the Company (including an Economic
Interest), (subject to Section 10.04) substitution of a new Member, the
remaining Members may require the Selling Member, Gifting Member or the proposed
purchaser, donee or successor-in-interest, as the case may be, to execute,
acknowledge and deliver to the remaining Members such instruments of transfer,
assignment and assumption and such other certificates, representations and
documents to perform all such other acts which the remaining Members may deem
necessary or desirable to:
(1) verify the purchase, gift or transfer, as the case may be;
27
<PAGE>
(2) confirm that the person desiring to acquire an interest in
the Company, or to be admitted as a Member, has accepted, assumed and agreed to
be subject and bound by all of the terms, obligations and conditions of the
Operating Agreement, (whether such Person is to be admitted as a new Member or
an Economic Interest Owner);
(3) maintain the status of the Company as a partnership for
federal tax purposes; and
(4) assure compliance with any applicable state and federal
laws including securities laws and regulations.
(g) Any sale or gift of a Membership Interest or Economic Interest
or admission of a Member in compliance with this Article 10. shall be deemed
effective as of the last day of the calendar month in which such transfer was
made, or, if no such consent was required pursuant to Section 10.03(c), then on
such date that the donee or successor interest complies with the conditions set
forth in Section 10.03(c). The Selling Member agrees, upon request of the
remaining Members, to execute such certificates or other documents and to
perform such other acts as may be reasonably requested by the remaining Members
from time to time in connection with such sale, transfer, assignment, or
substitution. The Selling Member hereby indemnifies the Company and the
remaining Members against any and all loss, damage, or expense (including,
without limitation, tax liabilities or loss of tax benefits) arising directly or
indirectly as a result of any transfer or purported transfer in violation of
this Article 10.
10.03 Transferee Not Member in Absence of Unanimous Consent.
(a) Notwithstanding anything contained herein to the contrary
(including, without limitation, Section 10.03 hereof), if all of the remaining
Members do not approve by unanimous written consent of the proposed sale or gift
of the Transferring Member's Membership or Economic Interest to a transferee or
donee which is not a Member immediately prior to the sale or gift, then the
proposed transferee or donee shall have no right to participate in the
management of the business and affairs of the Company or to become a Member. The
transferee or donee shall be merely an Economic Interest Owner. No transfer of a
Member's interest in the Company (including any transfer of the Economic
Interest or any other transfer which has not been approved by unanimous written
consent of the Members) shall be effective unless and until written notice
(including the name and address of the proposed transferee or donee and the date
of such transfer) has been provided to the Company and the non-transferring
Member(s).
(b) Upon and contemporaneously with any sale or gift of a
Transferring Member's Economic Interest in the Company which does not at the
same time transfer the balance of the rights associated with the Economic
Interest transferred by the Transferring Member (including, without limitation,
the rights of the Transferring Member to participate in
28
<PAGE>
the management of the business and affairs of the Company), all rights and
interest which were owned by the Transferring Member immediately prior to such
sale or gift or which were associated with the transferred Economic Interest
shall immediately lapse until either (1) the remaining Members, by unanimous
consent, reinstate such rights to the Economic Interest Owner who did not
previously obtain the unanimous written consent of the Members or (2) upon the
remaining Members, by unanimous written consent, reinstating such rights to a
successor or transferee of such Economic Interest Owner.
(c) The restrictions on transfer contained in this Section 10.03
are intended to comply (and shall be interpreted consistently) with the
restrictions on transfer set forth in Article 30 of the Act.
10.04 Purchase on Death.
(a) Upon the death of any Member who is an employee of the Company
("Active Member"), the Company (subject to the substitute Economic Interest
Owner election in 10.05(b) hereof), shall have the obligation to purchase all of
the Membership Interest owned by such Active Member either: (i) in lump sum
within ninety (90) days, or (ii) in monthly installments not to exceed three (3)
years, after qualification of the decedent's administrator, executor, or
personal representative. The Company may elect either payment option in its sole
discretion. The purchase price for such Membership Interest shall be as mutually
agreed upon or, failing agreement, at such price as may be determined by a
mutually acceptable independent valuator, and shall bear interest at a minimum
rate to avoid the imputation of interest by the Internal Revenue Service. The
independent valuator is not permitted to consider minority interest or lack of
liquidity to determine the purchase price for such Membership Interest.
(b) Notwithstanding the provisions of Section 10.05(a) above, a
spouse, heir or designated beneficiary of a deceased Member shall have the right
to become a substitute Economic Interest Owner (but not a Member), pursuant to
any trust, will, inheritance, or similar mechanism. In the event such spouse,
heir or designated beneficiary desires to become a substitute Economic Interest
Owner, such person shall serve written notice on the Company within ninety (90)
days of the date of death of such Member.
10.05 Earn-Back Option.
(a) KFx and the Radl Group have entered into a certain Earn-Back
Letter Agreement (the "Earn-Back Agreement"), of even date herewith, whereby KFx
shall transfer and/or sell 40 percent of its Membership Interests to the Radl
Group subject to the terms and conditions as more specifically set forth in the
Earn-Back Agreement.
(b) Each member, by entering into this Operating Agreement
acknowledges and consents to the terms, conditions and provisions of the Earn
Back Agreement.
29
<PAGE>
ARTICLE II.
ADDITIONAL MEMBERS
11.01 From the date of the formation of the Company, any Person or Entity
acceptable to the Members by their unanimous vote thereof may become a Member in
this Company either by the issuance by the Company of Membership Interests for
such consideration as the Members by their unanimous votes shall determine, or
as a transferee of a Member's Membership Interest or any portion thereof,
subject to the terms and conditions of this Operating Agreement. No new Members
shall be entitled to any retroactive allocation of losses, income or expense
deductions incurred by the Company. The Manager(s) may, at their option, at the
time a Member is admitted, close the Company books (as though the Company's tax
year has ended) or make pro rata allocations of loss, income and expense
deductions to a new Member for that portion of the Company's tax year in which a
Member was admitted in accordance with the provisions of Code Section 706(d) and
the Treasury Regulations promulgated thereunder.
ARTICLE 12.
DISSOLUTION AND TERMINATION
12.01 Dissolution.
(a) The Company shall be dissolved upon the occurrence of any of
following events:
(1) when the period fixed for the duration of the Company
shall expire pursuant to Section 2.05 hereof;
(2) by the unanimous written agreement of all Members; or
(3) upon the happening of a Withdrawal Event, unless the
business of the Company is continued by the consent of all the remaining Members
within ninety (90) days after the Withdrawal Event and there are at least two
remaining Members.
(b) Notwithstanding anything to the contrary in this Operating
Agreement, if a Member or Members owning in the aggregate not less than 86% of
the Percentage Interests vote to dissolve the Company at a meeting of the
Company pursuant to Article 7, then all of the Members shall agree in writing to
dissolve, or sell the assets of, the Company on the date upon or in the event of
no agreement, as soon as possible, but in any event not more than thirty days
thereafter.
(c) If a Member who is an individual dies or a court of competent
jurisdiction adjudges him to be incompetent to manage his person or his
property, the Member's executor,
30
<PAGE>
administrator, guardian, conservator, or other legal representative may exercise
all of the Member's rights for the purpose of settling his estate or
administering his property.
(d) A Member shall not take any voluntary action which directly
causes a Withdrawal Event. Unless otherwise approved by Members owning a
Majority Interest, a Member who resigns (a "Resigning Member") or whose
Membership Interest is otherwise terminated by virtue of a Withdrawal Event,
regardless of whether such Withdrawal Event was the result of a voluntary act by
such Member, shall not be entitled to receive any distributions in excess of
those distributions to which such Member would have been entitled had such
Member remained a Member. Except as otherwise expressly provided herein, a
Resigning Member shall immediately become an Economic Interest Owner. Damages
for breach of this Section 12.01(d) shall be monetary damages only (and not
specific performance), and such damages may be offset against distributions by
the Company to which the Resigning Member would otherwise be entitled.
12.02 Winding Up, Liquidation and Distribution of Assets.
(a) Upon dissolution, an accounting shall be made by the Company's
independent accountants of the accounts of the Company and of the Company's
assets, liabilities and operations, from the date of the last previous
accounting until the date of dissolution. The Managers shall immediately proceed
to wind up the affairs of the Company.
(b) If the Company is dissolved and its affairs are to be wound up,
the Managers shall:
(1) Sell or otherwise liquidate all of the Company's assets as
promptly as practicable (except to the extent the Managers may determine to
distribute any assets to the Members in kind),
(2) Allocate any profit or loss resulting from such sales to
the Members' and Economic Interest Owners' capital Accounts in accordance with
Article 9 hereof,
(3) Discharge all liabilities of the Company, including
liabilities to Members and Economic Interest Owners who are creditors, to the
extent otherwise permitted by law, other than liabilities to Members and
Economic Interest Owners for Distributions, and establish such Reserves as may
be reasonably necessary to provide for contingent liabilities of the Company
(for purposes of determining the Capital Accounts of the Members and Economic
Interest Owners, the amounts of such Reserves shall be deemed to be an expense
of the Company),
(4) Distribute the remaining assets in the following order:
31
<PAGE>
(i) If any assets of the Company are to be distributed in
kind, the net fair market value of such assets as of the date of dissolution
shall be determined by independent appraisal or by agreement of the Members.
Such assets shall be deemed to have been sold as of the date of dissolution for
their fair market value, and the Capital Accounts of the Members and Economic
Interest Owners shall be adjusted pursuant to the provisions of Article 9. and
Section 8.03 of this Operating Agreement to reflect such deemed sale.
(ii) The Positive balance (if any) of each Member's and
Economic Interest Owner's Capital Account (as determined after taking into
account all Capital Account adjustments for the Company's taxable year during
which the liquidation occurs) shall be distributed to the Members, either in
cash or in kind, as determined by the Managers, with any assets distributed in
kind being valued for this purpose at their fair market value as determined
pursuant to Section 12.02 (b) (i). Any such distributions to the Members in
respect of their Capital Accounts shall be made in accordance with the time
requirements set forth in Section 1.704.1(b)(2)(ii)(b)(2) of the Treasury
Regulations.
(c) Notwithstanding anything to the contrary in this Operating
Agreement, upon a liquidation within the meaning of Section 1.704-1 (b) (2) (ii)
(g) of the Treasury Regulations, if any Member has a Deficit Capital Account
(after giving effect to all contributions, distributions, allocations and other
Capital Account adjustments for all taxable years, including the year during
which such liquidation occurs), such Member shall have no obligation to make any
Capital Contribution, and the negative balance of such Member's Capital Account
shall not be considered a debt owed by such Member to the Company or to any
other Person for any purpose whatsoever.
(d) Upon completion of the winding up, liquidation and distribution
of the assets, the Company shall be deemed terminated.
(e) The Manager(s) shall comply with all requirements of applicable
law pertaining to the winding up of the affairs of the Company and the final
distribution of its assets.
12.03 Articles of Dissolution. When all debts, liabilities and obligations
of the Company have been paid and discharged or adequate provisions have been
made therefore and all of the remaining property and assets of the Company have
been distributed, articles of dissolution as required by the Act, shall be
executed in duplicate and filed with the Ohio Secretary of State.
12.04 Effect of Filing of Articles of Dissolution. Upon the filing of
articles of dissolution with the Ohio Secretary of State, the existence of the
Company shall cease, except for the purpose of suits, other proceedings and
appropriate action as provided in the Act. The Managers shall have authority to
distribute any Company property discovered after dissolution, convey real estate
and take such other action as may be necessary on behalf of and in the name of
the Company.
32
<PAGE>
12.05 Return of Contribution Nonrecourse to Other Members. Except as
provided by law or as expressly provided in this Operating Agreement, upon
dissolution, each Member shall look solely to the assets of the Company for the
return of its Capital Contribution. If the Company property remaining after the
payment or discharge of the debts and liabilities of the Company is insufficient
to return the cash contribution of one or more Members, such Member or Members
shall have no recourse against any other Member, except as otherwise provided by
law.
ARTICLE 13.
MISCELLANEOUS PROVISIONS
13.01 Notices. Any notice, demand, or communication required or permitted
to be given by any provision of this Operating Agreement shall be deemed to have
been sufficiently given or served for all purposes if (1) either by actual
delivery of the notice into the hands of the parties thereunto entitled; (2) or
by the mailing of the notice in the U.S. mail, certified mail, return receipt
requested; or (3) sent by nationally recognized, overnight delivery service,
addressed to the Member's and/or Company's address, as appropriate, which is set
forth in this Operating Agreement. The notice shall be deemed to be received in
case (1) on the date of its actual receipt by the party entitled thereto and in
cases (2) or (3) on the date of its mailing or deposit with such delivery
service. The failure or refusal of any party to accept any notice given pursuant
to this paragraph shall be conclusively deemed receipt thereof and knowledge of
its contents.
13.02 Books of Account and Records. Proper and complete records and books
of account shall be kept or shall be caused to be kept by the Managers in which
shall be entered fully and accurately all transactions relating to the Company's
business in such detail and completeness as is customary and usual for
businesses of the type engaged in by the Company. Such books and records shall
be maintained as provided in Section 9.14. The books and records shall at all
times be maintained at the principal place of business of the Company.
13.03 Application of Ohio Law. This Operating Agreement and its
interpretation shall be governed exclusively by its terms and by the laws of the
State of Ohio, and specifically the Act.
13.04 Waiver of Action for Partition. Each Member and Economic Interest
Owner irrevocably waives during the term of the Company any right that it may
have to maintain any action for the partition with respect to the property of
the Company.
13.05 Amendments. This Amended and Restated Operating Agreement may not be
amended except in writing by the affirmative vote of Members holding at least
86% of all
33
<PAGE>
Percentage Interests. Any amendment changing the Percentage Interests of the
Members requires the unanimous vote of the Members.
13.06 Execution of Additional Instruments. Each Member hereby agrees to
execute such other and statements of interest and holdings, designations and
other instruments necessary to comply with any laws, rules or regulations.
13.07 Construction. Whenever the singular number is used in this Operating
Agreement and when required by the context, the same shall include the plural
and vice versa and the masculine gender shall include the feminine and neuter
genders and vice versa.
13.08 Headings. The headings in this Operating Agreement are inserted for
convenience only and are in no way intended to describe, interpret, define, or
limit the scope, extent or intent of this Operating Agreement or any provision
hereof.
13.09 Waivers. The failure of any party to seek redress for default of or
to insist upon the strict performance of any covenant or condition of this
Operating Agreement shall not prevent a subsequent act, which would have
originally constituted a default, from having the effect of an original default.
13.10 Rights and Remedies Cumulative. The rights and remedies provided by
this Operating Agreement are cumulative and the use of any one right or remedy
by any party shall not preclude or waive the right to use any other remedy. Said
rights and remedies are given in addition to any other legal rights the parties
may have.
13.11 Severability. If any provision of this Operating Agreement or the
application thereof to any person or circumstance shall be invalid, illegal or
unenforceable to any extent, the remainder of this Operating Agreement and the
application thereof shall not be affected and shall be enforceable to the
fullest extent permitted by law.
13.12 Heirs, Successors and Assigns. Each and all of the covenants, terms,
provisions and agreements herein contained shall be binding upon and inure to
the benefit of the parties hereto and, to the extent permitted by this Operating
Agreement, their respective heirs, legal representatives, successors and
assigns.
13.13 Creditors. None of the provisions of this Operating Agreement shall
be for the benefit of or enforceable by any creditors of the Company.
13.14 Counterparts. This Operating Agreement may be executed in
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument. Signatures on this Operating Agreement
may be communicated by facsimile transmission and shall be binding upon the
parties transmitting the same by facsimile transmission.
34
<PAGE>
13.15 Entire Agreement. This Operating Agreement together with its
Exhibits supersedes all agreements previously made between the parties relating
to its subject matter. There are no other understandings or agreements between
them. It contains the entire agreement of the parties. It may not be changed
orally but only by an agreement in writing signed by the party against whom
enforcement of any waiver, change, modification, extension or discharge is
sought.
13.16 Joint Preparation. The Members have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arise, this Agreement shall be construed as
if drafted jointly by the Members and no presumption or burden of proof shall
arise favoring or disfavoring any Member by virtue of the authorship of any of
the provisions of this Agreement.
13.17 Incorporation of Exhibits, Annexes and Schedules. The Exhibits,
Annexes, and Schedules identified in this Agreement are incorporated herein by
reference and made a part hereof.
35
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their signatures, or the
signatures of their duly authorized representatives, to be set forth below on
the day and year first above written.
KFx, Inc.
By:________________________ _________________________
Theodore Venners Brad J. Radl
Its: President
________________________
AIW/P Holdings, Inc. Philip A. Weintz
an Ohio corporation
By:________________________ ________________________
Its: President Willie B. Roland, Jr.
________________________
Terry V. Radl
________________________
Richard W. Vesel
36
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
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<SECURITIES> 0
<RECEIVABLES> 220,729
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<CURRENT-ASSETS> 14,461,198
<PP&E> 11,657,125
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0
0
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