PACIFICORP FINANCIAL SERVICES, INC.
LETTER INTENT
(Covol Technologies)
September 12, 1996
Subject to the qualifications and conditions set forth below, PacifiCorp
Financial Services, Inc. ("PFS") proposes, directly and/or through its
subsidiaries and affiliates ("PFS Investors") to make the following investments
in Covol Technologies, Inc. ("Covol") and in the coal briquetting facility to be
located in Birmingham, Alabama, known as Alabama Syn Fuel #1 Ltd.
(the "Alabama Project").
Loan:
A PFS Investor shall make a first-priority secured convertible
loan (the "Loan") to Covol on the following terms:
a. Borrower: Covol ("Borrower").
b. Amount: $5,000,000, in the aggregate (the "Loan
Commitment").
c. Purpose: The Loans shall be available for the
following purposes: (i) $2.3 million to
complete construction by Covol of the
Alabama Project, (ii) to finance the
acquisition by Covol for the benefit of
the Alabama Project of up to 100,000 tons
of coal fines to be stored at the Port
Hodder site, (iii) funding of net
working capital needs of plant operations
of the Alabama Project as approved by
PFS, (iv) to finance the development and
construction of a wash plant for coal
fines at a location, price and with
specifications approved by PFS, and (v)
other uses by Borrowers as approved by
PFS in its sole discretion.
d. Advances: Subject to the terms and conditions
contained herein and in the final
documents, advances up to the
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aggregate Loan Commitment shall be made
from time to time through six months
after the date of the loan agreement (the
"Commitment Period"). Such advances
shall be made upon the written
request of Borrowers against invoices
for the purposes contemplated above as
approved by PFS. The first advance shall
be available on the last of the following
to occur: (i) October 1, 1996, (ii) the
filing of the request for a Letter Ruling
contemplated below, (iii) the obtaining
of a Coal Fines Contract (see "Coal
Fines," below), or (iv) the execution
and delivery of the Transaction
Documents. The amount and timing of the
Loan advances shall be staged over the
Commitment Period, with the availability
to be reflected in the final loan
agreement, as determined by mutual
agreement of the parties based upon
reasonable projections. For purposes
hereof, the "Transaction Documents"
shall mean the Loan Agreement, the
security agreement, the Alabama Project
Sale Agreement, the O&M Agreement, the
Licensing Contract, the Sales Contract
(each as defined below), and any
other documents or agreements required in
the opinion of PFS to effect the
transactions contemplated herein.
e. Term: 12 months from the date of the loan
agreement ("Maturity").
f. Interest: Prime + 2% per annum, compounded monthly;
unless the Loan is accelerated, interest
shall not be payable but shall accrue
prior to Maturity, at which point it will
be payable in full.
g. Prepayment; Voluntary Termination of Commitment:
Borrowers may prepay the Loan in whole
(but not in part) and terminate the
commitment to make further Loans at any
time without penalty; provided, that the
PFS Investors will have sixty-
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LLO1-48682.8 17509-028
days' notice prior to any such prepayment
and termination (the "Early Termination
Period") during which Early Termination
Period the PFS Investors may convert all
or any portion of the outstanding Loan,
and may simultaneously advance and
convert all or any portion of the
remaining commitment, in each case to
Common Stock of Covol, as set forth
below.
h. Termination of Commitment
By PFS: PFS may terminate the commitment to make
further Loans at any time it determines
(in the case of clause (iii), in its sole
discretion, and in the case of each of
the other clauses, in its reasonable
discretion) that (i) a favorable Letter
Ruling will not be obtained by Newco,
(ii) the environmental report discloses
an adverse matter, or (iii) an Event of
Default has occurred and is continuing
under the Transaction Documents.
i. Security: The obligation of Borrowers under the
Loan will be secured by a first priority
lien on all of the real and personal
property constituting the Alabama Project
(including, without limitation, an
assignment of all related contracts).
j. Covenants, Representations, etc.
To be negotiated.
k. Conversion: At any time, the PFS Investors may elect
to convert all or any portion of the then
outstanding principal and interest owing
under the Loan into shares of Common
Stock of Covol. In addition, within 30
days' prior to the end of the Commitment
Period and at any time during the Early
Termination Period, the PFS Investors may
elect to simultaneously advance and
convert all or any portion of the
remaining Loan Commitment into shares of
Common Stock of Covol. The PFS
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(Covol Technologies)
LLO1-48682.8 17509-028
*** Missing information may be available uon request to the Company
Investor shall receive one share of
Common Stock for each *** of principal
and/or interest converted (including,
without limitation, principal upon any
Loan which is simultaneously
advanced and converted).
l. Anti-dilution
Protection: ***
m. Registration Rights: The PFS Investors will have demand and
piggyback registration rights with
respect to any Common Stock received
upon conversion of the Loan. Covol
will be responsible for all of the
expenses of registration other than (i)
the cost of counsel to the PFS Investors
and (ii) any commission or similar
fee paid by the PFS Investors to an
underwriter or placement agent for the
sale of such Common Stock.
n. Board of Directors Meetings:
The PFS Investors will have
the right to receive
notices of all regular and
special meetings of the
Board of Directors of Covol
and any committee thereof
and the right to attend
such meetings.
Letter of Intent Page 4
(Covol Technologies)
LLO1-48682.8 17509-028
*** Missing information may be available upon request to the Company
Formation of Newco; Acquisition of Alabama Project:
It is anticipated that Alabama Synfuel #1 Ltd., a Delaware
limited liability partnership ("Alabama Synfuel"), will enter
into various agreements (which shall be in form and substance
satisfactory to the PFS Investors) with Covol for the
acquisition of the Alabama Project. An Alabama limited
liability company ("Newco") would be formed by the PFS
Investors. Newco would enter into an agreement with Alabama
Synfuel and Covol (the "Alabama Project Sale Agreement")
pursuant to which Alabama Synfuel would agree to assign to
Newco its right to acquire the entire interest in the Alabama
Project (including, without limitation, any of its rights
under the agreement with the design/builder for the Alabama
Project, any contracts relating to purchase of raw materials,
the lease of the land at the site, and the licenses
contemplated below, in each case relating to the Alabama
Project), and would assign the license of the technology from
Covol to Newco. In consideration of the foregoing transfers,
Newco would pay cash in the amount of *** to Alabama
Synfuels as the Base Licensing Fee contemplated below (see
"Licensing Contract," below) (which amount shall not be
payable until receipt of a favorable Letter Ruling
contemplated below,) and would provide to Alabama Synfuel a
six year installment note in the principal amount of ***,
bearing interest at *** per annum (the "Installment Note").
The transfer would occur upon the earlier of (i) receipt of
a favorable Letter Ruling contemplated below, or (ii)
immediately prior to start-up of the Alabama Project. Payments
upon the Installment Note would be made on a quarterly basis
after start-up of the Alabama Project (after an agreed-to
testing period) (such date, the "Acceptance Date") from
available net operating cash flow of Newco, at a rate of ***
per MM Btu (adjusted as set forth below) of briquettes sold
from the Alabama Project during the immediately preceding
quarter; provided that the full amount of the Installment Note
will be payable upon maturity.
Put Option:
If the Alabama Project is not completed consistent with
approved plans and specifications or placed in service (for
purposes of the Code and Section 29) by June 30, 1997, or if
there occur other defaults by Covol with respect to the
various Transaction Documents (a "Put Event"), then the PFS
Investors will have an option to require Covol to purchase
their entire interest in Newco and the Loan. The purchase
price under the put option shall be payable in cash in an
amount equal to the sum of (i) all capital contributions of
the PFS Investors to
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(Covol Technologies)
LLO1-48682.8 17509-028
*** Missing information may be available upon request to the Company
Newco, (ii) the outstanding principal and interest on the
Loan, and (iii) all of the out-of-pocket expenses of PFS and
the PFS Investors in connection with this transaction. Such an
event may also be, but shall not be required to be, considered
by the PFS Investors as an event of acceleration of the Covol
Loan.
Completion of Alabama Plant:
Covol shall be responsible for the completion of the
development and construction of the Alabama Project.
Operation and Maintenance:
Newco shall enter into an operating and maintenance agreement
(the "O&M Agreement") with Covol (or an affiliate thereof, the
"Operator"); provided that such O&M Agreement shall only be
effective upon the acquisition of the Alabama Project. In the
event there are any operating deficits with respect to the
operation and maintenance (excluding the O&M Fee referred to
below) of the Alabama Project, the Operator shall loan (the
"Deficit Loans"), from time to time, funds to Newco, at the
times and in the amounts needed to cover any such deficits. If
the Operator is not Covol, the undertakings of the Operator
under the O&M Agreement, including the obligation to make
Deficit Loans, shall be guaranteed by Covol. The Deficit Loans
shall bear interest at the Prime rate and be payable from net
operating cash flow of Newco. The O&M Agreement shall provide
for a quarterly fee (the "O&M Fees") to the Operator equal to
*** per ton of briquettes produced at the Alabama Project
during the immediately preceding quarter. Any accrued but
unpaid O&M Fee shall bear interest at the Prime rate and be
payable from net operating cash flow of Newco. The O&M
Agreement shall also provide for an annual incentive
management fee (the "O&M Incentive Fee") to the Operator equal
to *** of available net cash flow of Newco.
Licensing and Royalties:
Alabama Synfuels shall enter into a long-term licensing
contract (through rights received from Covol) (the "Licensing
Contract") which shall grant to Newco any licenses or similar
rights required in order to develop, construct and operate the
Alabama Project and to manufacture and market the briquettes;
provided that such Licensing Contract shall only be effective
upon the acquisition of the Alabama
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(Covol Technologies)
LLO1-48682.8 17509-028
*** Missing information my be available upon request to the Company
Project. Alabama Synfuels shall be paid a base fee (the "Base
Licensing Fee") under the Licensing Contract of $500,000
(which amount shall not be payable until receipt of a
favorable Letter Ruling contemplated below) and, after the
Acceptance Date, shall be entitled to a quarterly royalty
payment (the "Royalty") at a rate of $0.6014 per MM Btu
(adjusted as set forth below) of briquettes sold from the
Alabama Project during the immediately preceding quarter;
provided, that, from and after the time the Installment Note
has been paid in full, the Royalty shall be increased to a
rate of *** per MM Btu (adjusted as set forth below) of
briquettes sold from the Alabama Project during the
immediately preceding quarter. Any accrued but unpaid Base
Licensing Fee and Royalty shall bear interest at the Prime
rate and be payable from net operating cash flow of Newco.
Binder Contract:
Covol (and/or an appropriate affiliate of Covol, with the
undertaking guaranteed by Covol) shall enter into a long-term
contract with Newco to provide the "binder" required to
manufacture the briquettes (the "Binder Contract") at the
levels contemplated herein; provided that such Sales Contract
shall only be effective upon the acquisition of the Alabama
Project. The cost of the "binder" shall be cost plus ***;
provided, however, that the cost of the binder in any year
shall not be increased above the rate for the immediately
preceding year (and any increased rate for such year shall be
subject to rebate) if the imposition of the increased rate
would require a Deficit Loan. The Binder Contract shall
include rights and technology which would enable Newco to
manufacture the "binder" in the event the Covol was unable to
fulfill its obligations under the Binder Contract.
Long-Term Sales Contract:
Covol (and/or the appropriate affiliate of Covol, with the
undertaking guaranteed by Covol) shall enter into a long-term
contract for the purchase of briquettes from Newco (the "Sales
Contracts); provided that such Sales Contract shall only be
effective upon the acquisition of the Alabama Project. Covol
shall purchase all of the briquettes produced by the Alabama
Project for a purchase price equal to *** per ton for
metallurgical grade coal (which price may be adjusted, based
upon actual operating experience within the initial six months
of operation, such that the Alabama Project achieves a ***
(without considering the Section 29 Credit defined below),
with the prices adjusted as agreed to by the parties for
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(Covol Technologies)
LLO1-48682.8 17509-028
*** Missing information may be available upon request to the Company
other grades of coal (the "Sales Price"), which amount shall
be payable on a quarterly basis for the briquettes produced by
the Alabama Project and made available to Covol during the
immediately preceding quarter. Commencing the first
anniversary of the Sales Contract and on each anniversary
thereafter, the Sales Price per ton for the contract year then
commencing shall be increased by *** over the Sale Price for
the contract year just ended.
Adjustments to Fees and Payments:
Each of the amounts per ton reflected for the payments on the
Installment Note are based upon Newco maintaining a production
level of 300,000 tons of briquettes per year. In the event the
production level is less than 300,000 tons per year, the
payments under the Installment Note shall be adjusted
accordingly. In addition, commencing on the first anniversary
of the date of the acquisition of the Alabama Project, and
each anniversary thereafter, the amounts per ton reflected for
the payments on the Installment Note and the Royalty shall be
adjusted each year by *** of the relative change between (i)
the "inflation adjustment factor" (contemplated under Section
29(d)(2) of the Code) as calculated for the immediately
preceding year and (ii) the "inflation adjustment factor" as
calculated for the second preceding year.
Priority of Payments; Determination of Available Net Operating Cash Flow:
Net operating cash flow shall include the funding of
replacement and operating reserves for the Alabama Project,
the amounts and timing of which are subject to negotiation.
The payments set forth below which are payable from net
operating cash flow shall be made in the following order of
priority:
1. O&M Fee;
2. Installment Note;
3. Royalty; and
4. O&M Incentive Fee.
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(Covol Technologies)
LLO1-48682.8 17509-028
*** Missing informaiton mya be available upon request to the Company
Coal Fines:
Covol shall enter into a coal fines supply agreement with
Concord Coal Recovery, Ltd. (in form and substance acceptable
to PFS) (the "Concord Supply Agreement") which shall provide
Covol with a right of first refusal to obtain up to 20,000
tons of coal fines per month from the Concord USX coal fine
source at a price no more than *** per ton (adjusted annually
by no more than ***). In addition, Covol shall obtain a
long-term (a minimum of five years) fixed price contract(s)
(in form and substance acceptable to PFS) for the purchase of
up to an aggregate of 20,000 tons of coal fines per month (the
"Coal Fines Contracts"), which may include USX, to provide the
Alabama Project with a firm source of coal fines
(substantially similar in quality to the fines located at the
Concord USX coal fine source) required to manufacture
briquettes in an amount sufficient to operate the Alabama
Project at 240,000 tons per year and a term of at least five
years. Upon the acquisition of the Alabama Project, the
Concord Supply Agreement and the Coal Fines Contracts shall be
assigned to Newco.
Section 29 Credits; Letter Ruling:
As an additional condition to the obligation of the PFS
Investors to make the investments contemplated hereunder,
Newco shall obtain a letter ruling (the "Letter Ruling" from
the Internal Revenue Service setting forth the specific terms
of the proposed transaction and confirming to the satisfaction
of PFS, among other things, (i) the availability and
calculation of the credit available under Section 29 (the
"Section 29 Credits") of the Internal Revenue Code of 1986, as
amended (the "Code"), (ii) that the construction contract for
the Alabama Project satisfies the requirements of the Section
29 Credits, and (hi) that the allocation of the Section 29
Credits to the various members of Newco is valid under the
Code.
The letter ruling request shall be prepared by counsel and
accountants for PFS, but shall be subject to the review and
continent of Covol.
Call Option:
Newco will grant to Covol the right to acquire the Alabama
Project for cash at the then fair market value after January
1, 2008.
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(Covol Technologies)
LLO1-48682.8 17509-028
Support and Security; Set off Rights:
The obligations of Covol under the transaction documents shall
be guaranteed by the affiliates thereof. The obligations of
the Covol under the transaction documents shall also be
secured in a manner satisfactory to PFS, including, without
limitation, cross-collateralization and set off rights of the
various contracts and agreements.
Noncompetition:
Covol and the principals and affiliates thereof shall agree
not to (i) acquire coal fines for resale or use in any other
plant other than the Alabama Project, or (ii) build or be
involved in another briquetting plant using the same or
similar technology designed to produce "qualified solid
synthetic fuel" pursuant to Section 29 of the Internal Revenue
Code, in either case where the source of coal fines or the
plant are within a 100 mile radius of the Alabama Project
without the prior written consent of PFS.
Expenses:
Each party shall be responsible for its own legal expenses.
Covol shall be responsible for all other expenses relating to
the transactions, including, without limitation, expenses
relating to the transfer of the Alabama Project.
Option of PFS to Acquire Additional Plants:
PFS would have an option, upon the substantially similar terms
and conditions (other than the convertible loan), through
separate limited liability companies to acquire up to two
additional coal briquetting plants prior to December 31, 1998.
Nondisclosure:
THIS LETTER OF INTENT IS STRICTLY CONFIDENTIAL AND SHALL NOT
BE DISCLOSED BY COVOL OR ANY OF ITS AFFILIATES OR PFS OR ANY
OF ITS AFFILIATES TO ANY OTHER PERSON OR ENTITY WITHOUT THE
CONSENT OF THE OTHER PARTY.
Letter of Intent Page 10
(Covol Technologies)
LLO1-48682.8 17509-028
Due Diligence; Conditions to Closing:
The transaction is subject to satisfactory completion of the
following conditions and a due diligence inquiry into the
Alabama Project, the briquetting technology, the patents,
Covol, and the principals thereof and their respective
affiliates, including, but not limited to the following:
o Approval by the PacifiCorp Investment Committee.
o The creditworthiness of Covol and its affiliates.
o Negotiation of documentation acceptable to the
parties.
o Satisfaction of other conditions typically required
in a transaction such as that described herein, as
requested by PFS.
o Receipt by PFS Investors and Newco of a tax opinion
prepared by Covol's tax counsel acceptable to PFS
Investors addressing all material tax issues of the
transaction.
o Receipt by PFS Investors and Newco of a general
opinion prepared by Covol's counsel acceptable to PFS
Investors addressing all material authority,
enforceability and related issues of the transaction.
o Review to the satisfaction of PFS of the development
and construction budget, all construction documents
(including, but not limited to, drawings, plans,
specifications and inspection reports), environmental
studies or assessments, equipment data, permits,
orders, letters, tax and assessment bills, all public
agency documents (including directives, inspections,
and requirements) and other documents relating to the
Alabama Project.
o Review to the satisfaction of PFS of the availability
and quality of coal fines for use at the Alabama
Project, including, without limitation, the presence
of long term contracts for such fines satisfactory to
PFS and the marketability of the briquettes.
Letter of Intent Page 11
(Covol Technologies)
LLO1-48682.8 17509-028
o Review to the satisfaction of PFS of all
documentation pertaining to compliance results,
rulings, appeals, the zoning and land use regulations
and related matters governing the property where the
Alabama Project is to be located.
o Review to the satisfaction of PFS of all
documentation pertaining to the briquetting
technology, including, but not limited to, patents,
patent applications, and licenses.
o Receipt of an environmental audit relating to the
Alabama Project addressed to Newco and the PFS
Investors and acceptable to PFS.
o Receipt of confirmation acceptable to PFS that
neither Newco nor any PFS Investor shall be subject
to any environmental liability relating to the source
of the coal fines or any other matter relating to the
Alabama Project.
o Review of all matters relating to the tax credits to
the satisfaction of PFS.
o Review to the satisfaction of PFS of all
documentation pertaining to Covol and the issuance of
Common Stock.
o No material adverse change in the condition
(financial or other), business, net worth, results of
operations or expectations of Covol.
o Confirmation that Covol shall receive at least ***
of the net economic benefits from royalty and debt
service payments received by Alabama Synfuels.
Dated this 12th day of September, 1996.
PACIFICORP FINANCIAL SERVICES, INC.
By: /s/ Craig N. Longfield
Craig N. Longfield
President
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(Covol Technologies)
LLO1-48682.8 17509-028
ACKNOWLEDGMENT AND AGREEMENT
THE TERMS OF THE FOREGOING LETTER OF INTENT ARE HEREBY ACKNOWLEDGED AND AGREED
TO BY THE UNDERSIGNED ON ITS OWN BEHALF AND ON BEHALF OF ALABAMA SYNFUEL #l LTD,
A DELAWARE LIMITED PARTNERSHIP.
COVOL TECHNOLOGIES, INC.,
in its corporate capacity and as general partner
of Alabama Synfuel #1 Ltd.
By:/s/ Michael Midgley
Name: Michael Midgley
Title: President
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(Covol Technologies)
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