[letterhead]
ARTHUR J. GALLAGHER & CO.
November 13, 1996
COVOL Technologies, Inc., and
Utah Synfuel #1, L.P.
3280 N. Frontage Rd.
Lehi, UT 84043
Gentlemen:
Arthur J. Gallagher & Co. or one of its subsidiaries (the "Investor") hereby
acknowledges receipt of:
(a) Synthetic Coal Investment Summary dated October 31, 1996 attached as
Exhibit A hereto:
(b) Financial Projections dated November 7, 1996 entitled Gallagher Newco -
Preliminary Proforma attached as Exhibit B hereto; and
(c) Outline dated November 12, 1996 entitled US1 Acquisition Structure
attached as Exhibit C hereto.
The items described in (a), (b) and (c) above are collectively referred to
herein as the "Memorandum," and are incorporated herein and are made a part
hereof by reference. The transaction described in the Memorandum is referred to
herein as the "Transaction," and all other capitalized terms herein have the
same meanings as in the Memorandum.
Based on the foregoing Memorandum, the Investor hereby states its intention to
Covol and US1 (i) to make an initial investment of $2.5 million, and subsequent
license fees and other payments at the times and at the rates described in the
Memorandum in respect of the Facility described in the Memorandum and an initial
investment of $2.5 million, and subsequent license fees and other payments at
the times and at the rates described in the Memorandum in respect of the
Expansion described in the Memorandum, in each case based upon production and
sales of Briquettes set forth in the Memorandum, and (ii) to use its best
efforts to consummate the Transaction and the relevant agreements described in
the Memorandum at substantially the same prices, fees and other consideration as
soon as the conditions set forth below are satisfied.
The Transaction as set forth above is subject to the reasonable satisfaction by
the Investor of each of the following conditions:
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(a) Covol Technologies, Inc. ("Covol") has entered into agreements with
third parties for the supply of coal fines (necessary to produce at
least 320,000 tons of the Briquettes) and has demonstrated the ready
availability of the chemical binder;
(b) Covol has demonstrated its ability to sell the Briquettes produced at
the Facility;
(c) Covol has entered into an extension of its lease with Railco, Inc.
with respect to the facility site until December 31, 2011;
(d) review by the Investor's engineers of Covol's patented technology to
ensure that it meets the requirements of the relevant Private Letter
Ruling issued by the Internal Revenue Service to Covol and to ensure
that there is no material environmental liability to the Investor as a
result of this investment;
(e) the issuance of all necessary permits and licenses for the
construction of the Facility and Covol's agreement to obtain the
necessary permits and licenses for the operation of the Facility and
an appropriate washer;
(f) the Facility has been placed in service for purposes of Section 29 of
the Internal Revenue Code;
(g) the receipt by the Investor of a tax opinion from reputable counsel,
in form and substance reasonably satisfactory to the Investor, to the
effect that the Investor will more likely than not be entitled (i) to
the tax credits under Section 29 of the Internal Revenue Code
projected from the Transaction and (ii) to prevail on the other tax
issues which are the most significant to a taxpayer in the position of
the Investor;
(h) the receipt by the Investor of a legal opinion from reputable counsel,
in form and substance reasonable satisfactory to the Investor, to the
effect that Newco has been validly formed and that the Investor's
liability as an owner of Newco is limited to the extent of its
required investment in Newco;
(i) the execution by US1 and Covol of the relevant agreements described in
the Memorandum in form and substance reasonably satisfactory to the
Investor, and a satisfactory review of the legal and accounting
aspects of the transaction by the Investor; and
(j) the Facility has commenced daily operations and has produced at least
5000 tons of Briquettes during a 30-day period.
In consideration of the foregoing, Covol and US1 hereby agree that for the next
30 days, they will not negotiate with, or commit to, any other party with
respect to the Transaction and that they will extend such period for another 30
days thereafter if, in their sole discretion, they determine that Investor has
made substantial progress in consummating the Transaction. Covol
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and US1 also hereby agree that during such exclusive period, they will use their
best efforts to satisfy the above conditions and consummate the Transaction with
the Investor. The Investor acknowledges that it is and continues to be bound by
that certain confidentiality letter agreement dated September 30, 1996 between
Arthur J. Gallagher & Co. and Coalco Corporation (for itself and on behalf of
Covol). Nothing in this letter shall limit Covol's right to describe or show the
facility to any third party during such exclusive period or to discuss similar
investments in similar facilities with such third parties.
All parties acknowledge that after review of the Memorandum, counsel may
restructure the Transaction and the relevant agreements described in the
Memorandum to better meet the accounting, tax and other objectives of the
parties; all parties agree to work with counsel to make such changes as long as
they do not adversely affect the underlying economics of the Transaction.
In addition, subject to execution by Covol of the relevant agreements in form
and substance reasonably satisfactory to the Investor, the Investor also hereby
commits to make two loans in the aggregate amount of $4 million to Covol upon
the terms and conditions set forth below:
I. Convertible Loan.
(a) Borrower: Covol
(b) Amount: $1,100,000
(c) Advance: The loan amount shall be advanced to Covol
within three business days of the execution
of the convertible debt instrument.
(d) Term: Three years from the date of the advance.
(e) Interest: Six percent per annum simple interest;
interest shall not be payable but shall
accrue until the end of the term, at which
time it will be payable in full.
(f) Conversion: At maturity; Covol may at any time, however,
elect to convert all or any portion of the
outstanding principal and interest owing
into shares of common stock of Covol. The
Investor shall receive one share of common
stock; such shares having registration
rights, for each $11 of principal and/or
interest converted. The Investor may
elect to receive cash in lieu of stock in
the event Covol exercises its option prior
to maturity.
(g) Antidilution: The conversion price shall be subject to
adjustment to protect the Investor from
dilution from adjustments following
distributions, recapitalizations, stock
splits, dividends, and mergers.
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II. Secured Loan
(a) Borrower: Covol
(b) Amount: $2,900,000
(c) Advances: Advances up to the $2,900,000 amount shall
be made from time to time upon the written
request of Covol. The first advance shall
be available within three business days of
the execution of the loan documents.
(d) Term: Three years from the date of the execution
of the loan documents.
(e) Interest: Prime plus 2% simple interest; 50% of
interest shall be payable annually; the
balance shall accrue until the end of the
term, at which time it will be payable in
full.
(f) Prepayment: Borrower may prepay the loan in whole or in
part without penalty.
(g) Security: The loan shall be secured by a lien on all
real and personal property purchased with
the loan proceeds and Covol will account
to the Investor for the expenditure of all
funds.
The parties understand that the consummation and funding of the above loans are
not dependent on the consummation of the Transaction or the preconditions to the
Transaction, except for satisfactory confirmation by the Investor of the
patented process and satisfactory confirmation of joint venture agreements
entered into or proposed by Covol. However, the Transaction will not be
completed until the loans have been funded.
This is a letter of intent and, except as provided in the first and third
sentences of the paragraph beginning at the bottom of page two, no binding
agreement is intended to be created hereby and the parties shall be bound only
pursuant to duly executed and delivered definitive agreements referenced herein.
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If the foregoing correctly states our understanding, please so indicate by
signing below and returning to the undersigned a copy of this letter.
Very truly yours,
ARTHUR J. GALLAGHER & CO.
/s/ David R. Long
David R. Long, Vice President
Accepted and agreed this
15th day of November, 1996
COVOL TECHNOLOGIES, INC.
By: /s/ Brent M. Cook
Name/Title: Brent M. Cook, President
UTAH SYNFUEL #1, L.P.
By: /s/ Brent M. Cook
Name/Title: Brent M. Cook, President
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EXHIBIT A
SYNTHETIC COAL - SECTION 29
Investment Summary
October 31, 1996
Project Type: Using a patented binding process, coal fines (small pieces of
coal and coal dust resulting from coal mining) can be converted into
solid formed coal briquettes. Because the molecular structure of the
coal fines is modified during the process, the Internal Revenue
Service ("IRS") has ruled that the coal is a synthetic fuel, the
production and sale of which enables the seller to claim tax credits
under Section 29 of the Internal Revenue Code ("Code").
Project Description: Utah Synfuel # 1, L.P. ("US1") is a Delaware
limited partnership established to own and operate a coal fines
processing facility ("Facility") in Carbon County, Utah. The
Facility is currently undergoing start-up procedures and should be
fully completed by November, 1996. The synthetic coal from the
Facility will be sold to US1 who will then resell it to a
railroad company which owns a rail terminal near the Facility. US1
may also sell the synthetic coal to electric utility companies or
industrial facilities who use it in their boilers or processes.
Developer: Covol Technologies, Inc. ("Covol") a Delaware corporation is the
general partner of US1. Covol is a public company traded on the OTC
Bulletin Board and has a current market capitalization of
approximately $70 million.
Marketing Agent: Coalco Corporation ("Coalco"), a Massachusetts corporation
is an affiliate of Palmer Capital Corporation and is the marketing
agent seeking investor(s) to purchase the Facility from US1.
Investor: A tax-oriented corporate investor ("Investor") who purchases the
Facility from US1. The Investor should be able to project a long-term
ability to use tax credits through 2007.
Newco: The Investor will create a newly-formed entity ("Newco") which will
be created as a vehicle for the Investor to buy the Facility from US1.
Investment: Newco will purchase the Facility and a proprietary license from
US1 for $25 million payable at the closing with subsequent payments of
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approximately xxx cents per million British thermal units ("MMBtus")
from the synthetic coal produced and sold. The subsequent payments
will be made on a quarterly "pay as you go" basis in arrears to US1.
The Investor will be entitled to the Section 29 tax credits generated
by the Facility, as well as depreciation and cash flow from
operations. In return for its initial investment and subsequent
contributions, the Investor can expect to receive approximately $121
million of tax credits and approximately $39 million of additional
after-tax benefits and cash through 2007. Because the vast majority of
payments will be made as benefits are received, the return on
investment is exceptionally high "an after-tax IRR in excess of 100%).
Section 29 Credits: Section 29 of the Code provides a credit against
regular tax liability in an amount equal to $1.005 per MMBtu (1995
rate) for qualifying fuels sold to an unrelated third party. All
synthetic coal manufactured is expected to be sold as a qualifying
fuel. The Facility is expected to have a total capacity of 360,000
tons per year. The projected Section 29 credits available in 1997
would be approximately $90 million. The Section 29 credit is available
for production and sales through 2007 for output from this Facility.
The value of the tax credit per MMBtu rises each year with an
inflation rate.
Section 29 tax credits allow a corporate investor to offset taxes on
almost all kinds of income. However, Section 29 credits cannot be
used to reduce one's tax liability below the Alternative Minimum Tax.
Section 29 credits can be carried forward indefinitely to the extent
that the credits cannot be used as a result of the Alternative Minimum
Tax.
IRS Ruling: In September 1995 Covol received a private letter ruling from
the IRS which confirmed that the synthetic coal manufactured by
Covol's patented binding process qualifies for the Section 29 credit.
The private letter cited the fact that the molecular structure of the
coal fines is altered when certain chemicals used in Covol's process
are added to the coal fines causing the fines to bind together. The
IRS based its ruling on the findings of Covol and its consultants. The
primary technological findings, utilizing infrared spectrometry and
thermogravimetric mass spectroscopy, were provided by Advanced
Combustion Engineering Research Center ("ACERC") which is affiliated
with the University of Utah and Brigham Young University.
Additional support for these findings was provided by the Department
of Energy, Sandia National Laboratory and the United States Patent
Office.
Proprietary
7
Technology: Covol's patented technology combines its liquid binder with
coal fines which changes the structure of the carbon molecules so that
they can bind together as lump coal. Then an extruder or briquetter
forms the coal into usable shapes. This process enables the fuel to be
classified as a synthetic coal product, or synfuel, which is a
qualified fuel under Section 29.
In the process, a conditioner is sprayed on the coal fines. The
conditioner acts as a reducing agent which allows the oxygen
molecules of the coal to mix with the chemicals in the binder. The
introduction of the binder takes place in the pug mill or mixer. The
resulting moist granular mixture is then fed into the extruder. The
extrusions made by the extruder are called briquettes. The briquettes
emerge from the extruder and move on conveyor belts to the dryers
where the briquettes are heated to remove moisture. The finished
briquettes then emerge from the dryers. The binder and the Covol
chemical process of binding are both patented.
Facility Description: The manufacturing process uses an even-flow feeder, a
pug mill, an extruder, and dryers to form extrusions of compressed
coal (one inch in diameter by one to four inches in length).
The Facility is expected to produce approximately 360,000 tons per
year of synthetic coal. The synthetic coal is expected to have an
average heating value of 12,000 Btus per pound. Therefore, the sale
of a ton of synthetic coal generates over $25 in tax credits (12,000
Btus per pound times 2,000 pounds in a ton, divided by one million
times the tax credit rate, which is projected to be about $1.06 per
MMBtu in 1997.) Therefore, the total projected credits for 1997
from the operation are about $9 million increasing to about $12.8
million in 2007.
(A second production line is expected to be constructed in 1997 in the
same building with the first production line. This would double the
amount of tax credits available to approximately $19.6 million in
1998).
Equipment: With the exception of the two dryers, all of the major equipment
is new.
Land:The Facility is being constructed on land leased from the same
railroad company which will initially deliver fines and purchase the
synthetic coal output. The present lease is ten years, however, an
extension and renewal options are currently being negotiated.
US1 Structure: US1 is a Delaware limited partnership with Covol as the
majority owner and general partner. Covol has granted a non-exclusive
license for the technology to US1. US1 purchased and is installing the
Equipment under
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a turn-key contract with Lockwood Greene, a major engineering
and construction company headquartered in Spartanburg, SC. All
of US1's interest in the equipment necessary to make briquettes and
in the license for the technology is expected to be sold to Newco to
allow the Investor to claim the tax credits, depreciation and cash
flow from US1. Newco may retain Covol to operate and maintain the
Facility.
Operations: Covol will acquire and sell coal fines to Newco. Covol expects
to procure coal fines from nay suppliers located throughout Carbon
County and neighboring Emery County. For example, one supplier,
the railroad company on whose land the Facility is located, has
approximately 320,000 tons of coal fines located within one-half
mile of the Facility and is currently negotiating to sell and deliver
the coal fines to the Facility.
Covol has considerable experience in the production of the synthetic
fuel, having operated two similar facilities. Operating
experience of the Facility include personnel, a payment to Covol
for the liquid binder, a management fee to Covol, electricity from
Utah Power and Light, water from the Price Water District, and
natural gas. The Facility is projected to have an operating margin
of up to $1 per ton of synthetic coal produced.
US1 will purchase all of Newco's briquette output as produced and
will resell the briquettes to coal purchasers.
Coal Fines Supply: The conversion of coal Fines piles to a useable product
provides a significant environmental remediation benefit because coal
fines are essentially waste coal left behind at the mouth of a coal
mine. There are many coal fines piles in Carbon County and
neighboring Emery County including several which are under the
control of the State of Utah, Division of Oil and Gas and Mining
which is eager to begin clean-up and disposal of such coal fines
piles.
The Facility has been centrally located to allow Covol to utilize
coal fines from two major coal fines piles totaling about 6 million
tons located a few miles from the Facility. One of the coal fines
piles is only six miles from the Facility and is owned by a major
investor-owned utility which has closed its mining operations. The
other fines pile, located fifteen miles from the Facility, belongs
to a Fortune 500 mining Company. For both the utility and the mining
company, the coal fines piles are an environmental liability,
although for the utility it is a more pressing problem because the
utility has ceased operations at the site and has a large
reclamation bond which is frozen by the State of Utah until the pile
is removed.
9
The coal fines from the utility and the mining company piles contain a
higher percentage of ash than the coal fines from the 320,000 ton fines
pile one-half mile from the Facility. With the ash removed, the utility's
and mining company's piles can easily supply the Facility for over 15
years. To reduce the percentage of ash in the coal, near the end of the
first year of operation at the Facility (before the 320,000 ton coal fines
pile has been exhausted), US1 Covol expects to purchase and install a coal
washer at a cost of $2-3 million using, in part, the proceeds from this
financing. Once removed from the coal fines piles, ash and waste coal will
typically be returned to the coal fines pile site or placed in local
landfills. Typically, the original seller of the fines will retain
responsibility for ash disposal.
Technology History: In 1992, Covol built a prototype briquetting facility
in Price, Utah, which is located about five miles from the Facility.
Covol's fundamental business strategy has been to commercialize the
briquette-making technology through joint ventures, licenses and
collaborative arrangements with steel, coke and coal producers or investors
by building briquette- making facilities.
Risks and Mitigating Factors: This project has risks including the
traditional risks of any relatively new technology and business venture.
Many of the risks in this Covol transaction are substantially mitigated for
the Investor because of the structure of the primarily "pay-as-you-go"
investment and because of the fact that equipment will be in place and
operating prior to the initial investment. A listing of some of the risks
and their mitigating factors follows:
The Facility may not be operated efficiently or reliably. Quarterly
payments by the Investor for the Facility will be contingent on processing
and sale of briquettes in the prior quarter. As operator of the Facility
and majority owner of US1, Covol has substantial incentive to maximize
output.
The Facility may not receive air quality permits. The Facility is a "de
minimis" source of emissions and the air quality permit will be in hand
before the Investor makes the first investment. Further, the Facility is
solving a major environmental problem, the disposal of waste coal fines,
and, as such, enjoys a favorable review by environmentalists and
governmental agencies. The wash plant will require a separate air quality
and operating permit.
10
Section 29 tax credits may be reduced or eliminated because of higher oil
prices. In October 1992, Congress extended the availability of Section 29
credits to 2007 for coal synfuels (such as are produced by this Facility)
and gas produced from biomass. The Minimum Wage Increase Act of 1996
extended the grandfather dates for Section 29 projects to December 31, 1996
for binding construction contracts and June 30, 1998 for placement in
service. Therefore, the intent of Congress seems clearly in favor of
Section 29. With respect to the possible phase out of tax credits due to
high oil prices, oil prices would have to more than triple (to over $46 per
barrel) from the 1995 reference price ($14.62 per barrel) to begin to
reduce the availability of the credit and would have to quadruple to result
in a complete phase out of the credits. As the Investor would reap some of
the benefits from higher energy prices and only pays based on fuel produced
which qualifies for the credit, the Investor is well protected in this
scenario.
US1 may not be able to acquire the necessary coal fines. Before Newco buys
the Facility, US1 will have signed a contract with the railroad company to
deliver 320,000 tones of low-ash coal fines. This is nearly a one-year
supply and the railroad company will deliver the coal fines and take away
the briquettes. Negotiations are proceeding with the utility and the mining
company as explained above which would cover up to an additional 15 years
supply. Approximately 40 million tons of coal is mined each year in Carbon
County. There are additional coal fines piles located near the Facility
which need to be remediated.
Newco may not be able to sell the synthetic coal product. US1 will be
obligated to buy all the output of the Facility and then will be
responsible for reselling it to an end-user. Before Newco buys the
Facility, US1 will have signed a contract with the railroad company,
providing for the railroad to purchase the synthetic coal made from
the railroad company's own fines. Negotiations are proceeding with
other synthetic coal purchasers, including coal brokers and a mining
company for its cogeneration project near Salt Lake City. The
synthetic coal is desirable because it burns more evenly in a steam
boiler than does run-of-mine coal. Coal products from Utah enjoy
strong demand throughout the Western states and substantial amounts of
coal are sent from Utah to Asia, particularly Japan. Coal is a
commodity and synthetic coal will be sold for the same price per ton
as similar grades of coal.
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For further information, please contact Coalco Corporation, the
Marketing Agent.
Donald R. Logan
Vice President
Coalco Corporation
605 Willowglen Rd., Suite 200
Santa Barbara, CA 93105
Tel. (805) 687-2315
Fax (805) 687-2795
or
Gordon L. Deane
Executive Vice President
Palmer Capital Corporation
13 Elm Street, Suite 200
Cohasset, MA 02025
Tel. (617) 383-3200
Fax (617) 383-3205
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EXHIBIT B
GALLAGHER NEWCO
PRELIMINARY PROFORMA
13
*** Missing informaiton my be available upon request to the Company
EXHIBIT C
US1 ACQUISITION STRUCTURE
November 12, 1996
1. Covol Technologies, Inc., a Delaware corporation ("Covol") is a public
company which has developed a patented technology to produce synthetic
coal products ("Briquettes") from coal fines mixed with a chemical
binder.
2. Covol is leasing from Railco, Inc. certain real estate (the
"Premises") near Price, Utah for a term (and extension) commencing on
June 20, 1996 and ending on December 31, 2011; it has also entered
into a construction contract with Lockwood Greene for the construction
of a facility to produce the Briquettes (the "Facility") on the
Premises.
3. Covol has formed Utah Synfuel #1,L.P., a Delaware limited partnership
("US1") having Covol ***.
4. Covol and US1 have entered into a license agreement under which Covol
has granted US1 a non-exclusive license of the patented technology for
15 years for a lump sum payment of *** and a sale agreement under
which Covol will sell the Facility to US1 upon completion and delivery
for *** in cash.
5. Coalco Corporation, a Massachusetts corporation ("Coalco"), has
entered into an exclusive financial advisor agreement with Covol and
US1 under which Coalco has been engaged to advise on maximizing the
value of the Facility and the license. Coalco is owned by Douglas
Kinney, Gordon Deane, Thomas Linden and Donald Logan. Geocapital,
Inc., an Illinois corporation ("Geo") is owned by George Fink.
6. Coalco, after discussions with Geo, has introduced Covol and US1 to
Arthur J. Gallagher & Co. (the "Investor") who is interested in
maximizing the value of the Facility and the license.
7. The Investor will form and own a limited partnership ("Newco") with
Covol or a subsidiary thereof as its general partner and then agree to
fund Newco on an ongoing basis in order to accomplish the transactions
described in this Memorandum. The Investor will agree with US1 and
Covol that it will honor its agreed-upon funding obligations to Newco.
The Investor will enter into an agreement with Geo under which Geo
will be compensated for its role in the transaction on a quarterly
basis tied to the level of Briquette production and sales at the
Facility.
14
*** Missing information my be available upon request to the Company
8. Newco will enter into an acquisition agreement with US1 to acquire the
Facility for a purchase price of *** payable upon the Facility
passing the agreed-upon performance test described in paragraph (j) of
the accompanying letter.
9. US1 will also license the technology to Newco for 15 years for a fee
based on the amount of Briquettes produced and sold by Newco during
the prior quarter. The license fee will be at the rate of ***
(escalating with inflation). "Qualifying" means that the Briquettes
meet the standards represented in Covol's request dated March 22, 1995
for an IRS Private Letter Ruling.
10. Newco will give a first priority security interest over the Facility,
the license, and its related assets and rights back to US1 to secure
Newco's obligations under its agreements with US1 and Covol. If at any
time Newco defaults, US1 will be entitled to acquire the Facility and
related assets and license rights (for no consideration) through
foreclosure. If required by applicable laws to grant US1 additional
remedies as a secured creditor, Newco will deliver a ***
mortgage debt instrument to US1 at closing secured by the Facility.
This secured loan would be paid down during the next 11 years in equal
quarterly installments of principal. The preceding sentence modifies
the Financial Projections attached as Exhibit "B."
11. Covol will lease to Newco (i) the portion of the Premises on which the
Facility is located (ii) a portion of the building in which the
Facility is located, and (iii) certain equipment outside the building
(e.g. washer, truck scales, load equipment, etc.) which are incidental
but necessary to the Facility's operation. The lease will be in effect
until December 31, 2011 at a rental of *** per month (escalating
with inflation).
12. Newco will enter into an O&m Agreement with Covol for a fixed fee of
*** (escalating with inflation) payable quarterly. This fee will be
subject each quarter to an appropriate bonus (or penalty) which will
be payable (or assessed) to the extent of any excess (or shortfall)
in Briquettes produced and sold by Newco beyond or below) the
projected MMBtu's. The O&M fee is intended to cover routine O&M
expenses (including supplies, labor, etc.) for which Covol will be
responsible. In addition, Covol will wash the coal fines purchases by
Newco for a fee of *** per ton. Plus a reasonable ash disposal fee.
13. Newco, however, will be responsible for the actual expenses associated
with (a) utilities and coal fines washing; and (b) any necessary
modification or improvement of the Facility and for non-routine
repairs, provided that in each case such expenses do not exceed
annually the amount set forth in a 12-year "operations budget" and a
12-year "capital expenditure budget," respectively, agreed-upon
between Newco and Covol at closing. Covol will be responsible for any
expenditures in excess of the annual budgets. Newco will basically own
and operate the Facility in accordance with the assumptions in the
financial models.
15
*** Missing information my be available upon request to the Company
14. Covol will enter into a supply agreement with Newco to use its best
efforts to supply and deliver until December 31, 2007 the coal fines
and the chemical binder necessary to produce the Briquettes at market
prices which are assumed for the purpose of the Outline to be ***
per ton for the coal fines and *** per ton for the chemical binder
(both prices escalating with inflation or a coal price index). In
turn, Covol will then have the obligation to locate and purchase
adequate coal fines from suppliers in the area and the necessary
chemical binder throughout the term of the supply agreement.
15. Using the coal fines and the chemical binder, Newco will then produce
the Briquettes and sell them to US1 pursuant to an 11-year "take or
pay" arrangement at a price equal to the *** (escalating at
the same rate as in #14 above - either with inflation or a coal price
index). Newco will have the right to sell the Briquettes to a third
party at a higher price but US1 will then have the right to match. In
turn, US1 will be responsible for selling all the Briquettes produced
at the Facility to willing end-users who would use the Briquettes to
provide energy for their manufacturing, industrial or other facility.
16. US1 will have the right under its acquisition agreement with Newco to
reacquire on January 1, 2008 the Facility and related assets for their
ten fair market value.
17. Newco will have the right to "abandon" the Facility and related assets
in the case where there is a material adverse change to the economics
of the transactions or the Investor is unable to utilize the tax
benefits. Newco will provide US1 with advance notice of its intention
to abandon the Facility. Such notice shall be six months in advance if
one line is in operation and three months in advance if two lines are
in operation. In each case, US1 will be required to use its best
efforts to resume possession and title to all such assets for fair
consideration (not to exceed 50% of the initial down payments) to
Newco. After three years from the closing of the Transaction, Newco
shall waive such fair consideration if it abandons the property
pursuant to this paragraph.
18. In addition, Covol will undertake to enter into a construction
agreement for the expansion of the Facility (the "Expansion") prior to
December 31, 1996. The Expansion, after completion, would be capable
to producing another 360,000 tons of Briquettes annually, Covol will
undertake to have the Expansion completed and in daily operation prior
to September 30, 1997 and to do all other things necessary to qualify
the production for credits under Section 29 of the Code.
19. Newco will acquire the Expansion upon startup for a purchase price of
*** payable as follows: *** when Briquette production from the
Facility reaches *** tons in any 30-day period; *** when Briquette
production from the Expansion reaches *** in any 30-day period; and
*** in three *** installments payable when Briquette production from
the Expansion reaches the ***, *** and *** cumulative ton milestones.
In addition, Newco, Covol and US1 will
16
also consummate the relevant agreements (and on terms substantially
the same as are) set fothr in #8-17 above, except (i) Covol or its
designee will be the other party in each case instead of US1, and (ii)
the equipment (except the washer) and building leased in #11 (ii) and
(iii) will be transferred to Newco for no additional consideration.
20. All agreements described in this Outline are to be governed by the
laws of the State of Utah.
21. The parties will be responsible for their respective costs and
expenses (including all counsel fees) incurred in the consummating the
Transaction. The Investor will be responsible for the costs and
expenses (including all counsel fees) incurred in managing Newco's
business or affairs.
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