-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gsm9HODdT8XxmPkc6MDJhJP5GeLa2PIJhomEKMboJ4XMuHNX2b6yhITygAy+lp+U H8on7PmXG3UDjzluwU8O9w== 0001038838-99-000213.txt : 19991018 0001038838-99-000213.hdr.sgml : 19991018 ACCESSION NUMBER: 0001038838-99-000213 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19991007 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COVOL TECHNOLOGIES INC CENTRAL INDEX KEY: 0001003344 STANDARD INDUSTRIAL CLASSIFICATION: BITUMINOUS COAL & LIGNITE MINING [1220] IRS NUMBER: 870547337 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-67371 FILM NUMBER: 99724567 BUSINESS ADDRESS: STREET 1: 3280 N FRONTAGE RD CITY: LEHI STATE: UT ZIP: 84043 BUSINESS PHONE: 8017684481 S-3/A 1 FORM S-3 AMENDMENT NO. 4 DATED 11/16/98 As filed with the Securities and Exchange Commission on October 7, 1999 Registration No. 333-67371 - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ------------ FORM S-3 AMENDMENT NO. 4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------- COVOL TECHNOLOGIES, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 87-0547337 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 3280 North Frontage Road Lehi, Utah 84043 (801) 768-4481 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) Kirk A. Benson Chairman of the Board of Directors 3280 North Frontage Road Lehi, Utah 84043 (801) 768-4481 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) Copies to: Richard T. Beard, Paul H. Shaphren Callister Nebeker & McCullough Gateway Tower East, Suite 900 10 East South Temple Salt Lake City, Utah 84133 (801) 530-7300 Approximate date of commencement of proposed sale to the public: From time to time after this Registration Statement becomes effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box: |_| If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: |X| If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering. |_| If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. |_| ---------------- Covol hereby amends this Form S-3 on such date or dates as may be necessary to delay its effective date until Covol shall file a further amendment which specifically states that this Form S-3 shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Form S-3 shall become effective on such date as the SEC, acting pursuant to said Section 8(a), may determine. The information contained in this prospectus is not complete and may be changed. We may not sell these securities until the Form S-3 filed with the SEC is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. The information contained in this prospectus is not complete and may be changed. We may not sell these securities until the Form S-3 filed with the SEC is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Preliminary prospectus Subject to Completion dated October 7, 1999 Prospectus 4,987,454 SHARES COVOL TECHNOLOGIES, INC. COMMON STOCK This is an offering of shares of common stock of Covol Technologies, Inc. Only the selling stockholders identified in this prospectus are offering shares to be sold in the offering. Covol is not selling any shares in the offering. Covol's common stock is quoted on the Nasdaq Stock Market(sm) under the symbol CVOL. On October 6, 1999, the last reported sale price for the common stock on the Nasdaq Stock Market(sm) was $2.50 per share. Covol's executive offices and telephone number are: 3280 North Frontage Road Lehi, Utah 84043 (801) 768-4481 This investment involves high risks. See "Risk Factors" beginning on page 3. -------------------- The common stock offered in this prospectus has not been approved by the SEC or any state securities commission, nor have these organizations determined that this prospectus is accurate or complete. Any representation to the contrary is a criminal offense. ----------- The date of this prospectus is October 7, 1999 1 You should rely only on the information incorporated by reference or provided in this prospectus or any prospectus supplement. We have not authorized anyone else to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information in this prospectus or any prospectus supplement is accurate as of any date other than the date on the front of those documents. ------------------ TABLE OF CONTENTS ------------------ Page RISK FACTORS................................................................ 3 FORWARD LOOKING STATEMENTS....................................................9 AVAILABLE INFORMATION........................................................ 9 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................. 10 MATERIAL CHANGES............................................................ 11 USE OF PROCEEDS............................................................. 12 SELLING STOCKHOLDERS........................................................ 12 PLAN OF DISTRIBUTION........................................................ 17 LEGAL MATTERS............................................................... 17 EXPERTS..................................................................... 18 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ............................. 18 SIGNATURES ................................................................. 23 2 RISK FACTORS You should consider carefully the following risk factors and other information in this document before investing in our common stock. We Have a History of Losses; No Assurance of Profit We have incurred total losses of approximately $58,000,000 from February 1987 through June 30, 1999. All quarters have had operating losses, including a loss of approximately $5,500,000 for the quarter ended June 30, 1999. We may not be profitable in the future. Ongoing Financial Viability Depends on Operations Success for License Revenues Our existence depends on the ability of our licensees to produce and sell synthetic fuel which will generate license fees to us. There are twenty-four synthetic fuel plants that utilize our patented technology and from which we intend to earn license fees. There are four additional facilities which utilize a technology that we acquired during the six months ended March 31, 1999. Collectively, these 28 facilities do not presently operate at levels needed to generate significant revenues to us. Improved operations at each of these plants depends on the ability of the plant owner to produce a marketable quality of synthetic fuel, and the ability of the plant owner to market the synthetic fuel. Licensees and our owned facilities must successfully address all operating issues, including but not limited to, feedstock availability, cost, moisture content, Btu content, correct binder formulation, operability of equipment, product durability, resistance to water absorption and overall costs of operations, which in many cases to date have resulted in unit costs in excess of resale prices. It is not certain what time will be required to resolve these operating issues or whether these issues can be resolved, and it is not certain how much time will be required for the synthetic fuel to obtain market acceptance. These problems are in some ways beyond our control. Our Owned Facilities Have Not Been Sold and Have Substantial Operating Cash Needs We currently own three synthetic fuel facilities that are held for sale. Operation of these facilities requires a substantial amount of cash. In September 1999, we obtained debt financing which provided net proceeds of approximately $800,000 with availability for additional borrowings of up to $2,800,000. These proceeds will be used for operating expenses and debt service requirements until sufficient operating revenues are generated or the facilities are sold. It is not certain when or whether license revenues will be sufficient to meet operating and debt service requirements. Therefore, we do not know how long the current capital will last. We are continuing to cut operating costs, but further potential cost reductions are limited due to our need to work with plant owners in order to increase license revenues. Operating expenses associated with these plants currently cost approximately $500,000 per month. Marketing difficulties have kept us from generating sales revenues equal to operating expenses, negatively affecting cash flows and increasing capital requirements. We are actively trying to sell these plants and enter into license agreements under which we would be paid advance license fees and license fees based on production. None of these plants is presently under contract for sale. A non-binding letter of intent has been signed, which if fully consummated, would result in the sale of Covol's synthetic fuel business, including the three owned synthetic fuel facilities. More information on this proposed transaction is provided in Covol's Form 8-K filed July 7, 1999. 3 Debt Terms and Covenants Restrict Our Activities We entered on March 17, 1999 into debt and equity financing that contains restrictions on business activities and covenants for future activities. We also agreed to meet specific quarterly earnings targets beginning with the quarter ending December 31, 1999 and for subsequent quarters. The consolidated earnings target for the quarter ending December 31, 1999, adjusted principally for interest, taxes, depreciation and amortization, is $5,000,000. The earnings target increases in subsequent quarters. These terms and conditions also restrict or prohibit specific activities, including for example, incurring more than $4,000,000 of additional indebtedness, and the issuance of debt or equity securities in a senior position. Non-compliance could result in penalty charges, acceleration of repayment, increased interest or assignment of royalty payments from related collateral. See our Form 8-K filed March 24, 1999 for a discussion of the debt terms. We or our Licensees May Not Qualify for Tax Credits Granted by Congress to Encourage Production of Alternative Fuels Section 29 of the Internal Revenue Code provides a tax credit for the production and sale of qualified synthetic fuel. We received a private letter ruling from the IRS in which the IRS agrees that synthetic fuel manufactured using our technology qualifies for the Section 29 tax credits. At least seven other private letter rulings have been issued by the IRS to licensees of our technology. These rulings may be modified or revoked by the IRS if the IRS adopts regulations that are different from these rulings. Also, a private letter ruling may not apply if the actual practice differs from the information given to the IRS for the ruling. Therefore, tax credits may not be available in the future, which would materially adversely impact us. See our Form 10-K for fiscal year 1998, "ITEM 1. BUSINESS - Tax Credits" for an explanation of qualifications for Section 29 tax credits. Based upon the language of Section 29 of the Internal Revenue Code and private letter rulings issued by the IRS to us and our licensees, we and our licensees believe the synthetic fuel facilities built and completed by June 30, 1998 are eligible for Section 29 tax credits. However, the ability to claim the tax credits is dependent upon a number of conditions including, but not limited to, the following: o The facilities were constructed pursuant to a binding contract entered into on or before December 31, 1996; o All steps were taken for the facility to be considered placed in service; o Manufacturing procedures are applied to produce a significant chemical change and hence a "qualified fuel"; o The synthetic fuel is sold to an unrelated party; and o The owner of the facility is in a tax paying position and can therefore use the tax credits. The IRS may challenge us or our licensees on any one of these or other conditions. Also, we or our licensees may not be in a financial position to claim the tax credits if we or they are not profitable. The inability of a licensee to claim tax credits would potentially reduce our income from the licensees. Our accounting and valuation procedures assume qualification for Section 29 tax credits so that synthetic fuel production will continue to be the highest and best use of our equipment and facilities. If they lose their qualification under Section 29, the equipment and facilities could be overvalued in any alternative highest and best use. 4 Synthetic Fuel Facilities May Not Be Commercially Viable After the Tax Credits Expire The synthetic fuel facilities that qualify for tax credits under Section 29 of the tax code receive economic benefits from the tax credits in addition to the benefits, if any, from operations. It is possible that synthetic fuel facilities that are not eligible for tax credits cannot be built and operated profitably. Section 29 expires on December 31, 2007 after which tax credits will not apply to the synthetic fuel facilities. In order to remain competitive and commercially viable after 2007, we must manage our costs of production and feedstock, and we must also develop the market for synthetic fuel with adequate prices to cover the costs. Other Applications of Our Technology May Not Be Commercially Viable We have developed and patented technologies related to the briquetting of wastes and by products from the coal, coke and steel industries. We have also tested in the laboratory the briquetting of other materials. However, to date we have only commercialized our coal-based synthetic fuel application. The other applications have not been commercialized or proven out in full-scale operations. We may not be able to employ these other applications profitably. See our Form 10-K for fiscal year 1998, "ITEM 1. BUSINESS - Business Strategy - Engineered Resources" for a discussion of non-coal applications of our technology. We May Be Unable to Obtain Necessary Additional Funding We have significant cash outflow requirements for: o debt repayments, o working capital, and o implementation of our business strategy. The current amount of outstanding debt is approximately $40,000,000, of which approximately $5,000,000 is due between now and December 31, 1999. Additional debt of approximately $16 million is due in the calendar year 2000. Substantially all of our property, plant and equipment and facilities held for sale are collateral for debt. Our cash needs will differ depending on the operations of the licensees' synthetic fuel facilities and the timing of the sale of three facilities which are currently owned by us and held for sale. Our ability to pay debt as it matures is dependent primarily upon our ability to sell the facilities which are held for sale. There can be no assurance that we will sell the facilities or be able to raise any additional funds when needed on terms acceptable to us. Potential Asset Impairment for Advances on Inventories From February 1997 through May 1999, Covol paid approximately $3,900,000 to acquire coal fines for feedstock for the Utah Synfuel plant and to lease the related property where the coal fines are located. Coal fines representing approximately $200,000 of the amount paid have been used in operations. The balance of $3,700,000 has been recorded as an advance on inventories on Covol's balance sheet, and a possible future impairment could reduce Covol's recorded inventories in an amount up to $3,700,000. Covol has learned that there is a dispute over the ownership of the property and is also 5 concerned there may be less recoverable coal fines on the property than was understood when the contract was entered into. As a result of these developments, Covol has demanded the lessor to modify the lease and has stopped making quarterly payments under the contract. See "Material Changes--Earthco Lease" in this prospectus. Covol may need to record a future asset impairment for all or a portion of the amount recorded as advances on inventories if: o the legal ownership of the fines is not satisfactorily resolved, o Covol can not use the coal fines paid for prior to contract termination or any extension thereof, or o the quantity of coal fines at the site is materially less than what was understood and Covol is unable to recover amounts already paid. We are Dependent Upon Third Party Licensees for Commercial Application of Technology We depend on licensees to commercially employ our technology. The payments received by us as royalties and from sales of our patented chemical binder to the facilities, are directly related to the level of production and sales of the synthetic fuel. There is no assurance that our licensees will be able to operate the facilities at a sufficient level of production to provide adequate payments to us to meet our ongoing financial needs. See our Form 10-K for fiscal year 1998, "ITEM 1. BUSINESS - Synthetic Fuel Manufacturing Facilities" for a list of our licensees and a discussion of our license and royalty agreements with them. Market Acceptance of Synthetic Fuel Products is Uncertain We are uncertain of the market acceptance of products manufactured using our technology. Synthetic fuel is a relatively new product and competes with standard coal products. Industrial coal users must be satisfied that the synthetic fuel is a suitable substitute for standard coal products. Moisture control, hardness, special handling requirements and other characteristics of the synthetic fuel product may affect its marketability, including sales price. We may be unable to meet the product quality requirements of all our customers. Many industrial coal users are also limited in the amount of synthetic fuel product they can purchase from us and our licensees because they have committed a substantial portion of their coal requirements through long-term contracts. Reliance on spot markets have generally produced lower resale prices compared to long-term coal supply contracts in the utility industry. For these and other possible reasons, customers may not purchase the synthetic fuel products made with our technology. To date our owned facilities and licensees have secured contracts for the sale of only a portion of their production. The suitability of synthetic fuel as a coal substitute and particularly the quality characteristics of synthetic fuel, the overall downward trend in coal prices, and the traditional long-term supply contract practices of fuel buying in the utility industry have made the identification of purchasers of synthetic fuel difficult. We do not know if our owned facilities and licensees will be able to secure market contracts for their synthetic fuel products at full production levels. Supply of Sufficient Raw Materials for Synthetic Fuel Facilities is Not Assured We and our licensees have not secured all the raw materials needed to operate all of the facilities for the full term of the tax credit. Some of the owners of facilities are constructing coal washing facilities to provide feedstock and some of the facilities may have to be moved to sites with enough raw materials 6 for operation. See our Form 10-K for fiscal year 1998, "ITEM 1. BUSINESS - Supply of Raw Materials" for a discussion of our principal sources of raw materials. We Must Comply With Government Environmental Regulations The synthetic fuel facilities which use our technology must satisfy regulations regarding the discharge of pollutants into the environment. We or the facility owners may be subject to fines for any violation of regulations due to design flaws, construction flaws, or operation errors. A violation may prevent a facility from operating until the violation is cured. We or our licensees may be liable for environmental damage from facilities not operated within environmental guidelines. See our Form 10-K for fiscal year 1998, "ITEM 1. BUSINESS - Government Regulation" for a discussion of the principal areas of federal and state regulation which we are subject to. We have Significant Competitors We experience competition from: o Other alternative fuel technology companies and their licensees, o Companies that specialize in the disposal and recycling of waste products generated by coal, coke, steel and other resource production, and o Traditional coal, fuel, and natural resource suppliers. Competition may come in the form of the licensing of competing technologies or in the marketing of similar products. We currently have limited experience in manufacturing and marketing. Many of our competitors have greater financial, management and other resources than we have. We may not be able to compete successfully. See our Form 10-K for fiscal year 1998, "ITEM 1. BUSINESS - - Competition" for a discussion of the competitors in the synthetic fuel industry that we are aware of. Limitation on Protection of Key Intellectual Property We rely on patent, trade secret, copyright and trademark law, as well as confidentiality agreements and other security measures to protect our intellectual property. These rights or future rights or properties may not protect our interests in present and future intellectual property. Competitors may successfully contest our patents or may use concepts and processes which enable them to circumvent our technology. See our Form 10-K for fiscal year 1998, "ITEM 1. BUSINESS - Proprietary Protection" for a list of our trade names, patents and other intellectual property and a discussion of its value to us. Technological Developments by Third Parties Could Increase Our Competition Alternative fuel sources and the recycling of waste products are the subject of extensive research and development by our competitors. If a competitive technology were developed which greatly increased the demand for waste products or reduced the costs of alternative fuels or other resources, the economic viability of our technology would be adversely affected. Furthermore, we may not be able to develop or refine our technology to keep up with future synthetic fuel requirements or to commercialize the other applications of our technology as discussed in our business strategy. See our Form 10-K for fiscal year 1998, "ITEM 1. BUSINESS - Business Strategy - 7 Licensing and Technology Transfer" for a discussion of our efforts to continue to develop and refine our technology. Operations Liability May Exceed Insurance Coverage We are subject to potential operational liability risks, such as liability for workers compensation and injuries to employees or third parties, which are inherent in the manufacturing of industrial products. While we have obtained casualty and property insurance in the amount of $10,000,000, with the intent of covering these risks, there can be no assurance that operation of our owned facilities will not expose us to operational liabilities beyond our insurance coverage. No Dividends Are Contemplated in the Foreseeable Future We have never paid and do not intend to pay dividends on common stock in the foreseeable future. In addition, dividends on common stock cannot be paid until cumulative dividends on our outstanding preferred stock are fully paid. Our ability to pay dividends without approval of the debt and equity holders is also restricted and prohibited by covenant as long as the debt and equity issued in our March financing is outstanding. Common Stock Price May Continue to be Volatile Our common stock is traded on the Nasdaq Stock Market(sm) . The market for our common stock has been volatile. Factors such as announcements of production or marketing of synthetic fuel from the synthetic fuel facilities, technological innovations or new products or competitors announcements, government regulatory action, litigation, patent or proprietary rights developments, and market conditions in general could have a significant impact on the future market for our common stock. You may not be able to sell our common stock at or above your purchase price. Preferred Dividends Accumulate Until Paid and Must Be Paid Prior to Any Dividends to Holders of Common Stock We have issued preferred stock that has preferential dividend rights, which dividends will accumulate if unpaid. Dividends on common stock are prohibited until the preferential rights of the preferred stock are satisfied. If we are liquidated, the preferred stockholders are entitled to liquidation proceeds after creditors but before common stockholders. The preferred stock can be converted to common stock. See our Form 8-K filed March 24, 1999 for a discussion of rights of the preferred stock. Future Sales of Common Stock May Dilute Stockholders We have the authority to issue up to 12,234,474 additional shares of common stock and 9,922,490 additional shares of preferred stock. We may issue stock in the future at amounts below current market prices which would cause dilution to stockholders. Conversion of Convertible Securities May Dilute Stockholders We have issued many securities which are convertible into registered common stock. As of October 6, 1999, we had approximately 12,765,000 shares outstanding and substantially all remaining authorized shares are issuable upon conversion of convertible preferred stock and convertible debt, and 8 upon exercise of warrants and options. Approximately 3,600,000 shares are issuable upon exercise or conversion at prices below the current market price. We have commitments to issue approximately 2,975,000 shares of common stock to current and prior management, consultants, advisors and board of director members under all option agreements. Approximately 1,070,000 options are exercisable at prices below the current market price. These options have a weighted average exercise price of $1.50 per share. These numbers are as of October 6, 1999 and do not reflect additional shares we may issue in the future pursuant to anti-dilution provisions. To the extent warrants, options and other convertible securities are converted into common stock, stockholder interests in us will be diluted. If the market value of the common stock decreases significantly, the offering price per share in our private placements or public offerings may decrease causing dilution of ownership to other stockholders. Dilution of Stockholders Due to Sales of Common Stock and Conversion of Convertible Securities May Affect Our Ability to Raise Additional Capital Sales of common stock and convertible preferred stock, and the exercise of options, warrants and other convertible securities may have an adverse effect on the trading price of and market for our common stock. A significant portion of shares underlying our outstanding convertible securities and options and warrants are subject to registration rights. These rights may affect our ability to raise additional capital because financial institutions which require registration rights may be unwilling to proceed with a financing where there are registration rights already in place which impair the value of any new registration rights. We are Under a Grand Jury Inquiry Which has Not Been Resolved In 1997 we received a notice of violation and order of compliance from the State of Utah, Division of Air Quality alleging improper asbestos handling. We signed a settlement with the state and paid a fine in the amount of $11,000. In 1997 the U.S. Environmental Protection Agency began its own investigation. The U.S. Attorney has proceeded with a grand jury inquiry. The outcome of this matter may have adverse effects on us. FORWARD LOOKING STATEMENTS Some of the statements contained in this prospectus discuss future expectations, contain projections of results of operations or financial condition or state other "forward-looking" information. Such information can be identified by the use of "may," "will," "expect," "anticipate," "estimate," "continue" or other similar words. When considering such forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this prospectus. These statements are subject to known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from those contemplated by the statements. AVAILABLE INFORMATION We file annual, quarterly and special reports, proxy statements and other information with the SEC. Our SEC filings are available to the public over the Internet at the SEC's web site at http://www.sec.gov. You may also read and copy any document we file at the SEC's public reference 9 rooms in Washington, D.C., New York, New York, and Chicago, Illinois. Please call the SEC at 1-800- SEC-0330 for further information on the public reference rooms. You may also read and copy these documents at the offices of the Nasdaq Stock Market(sm) in Washington, D.C. This prospectus is part of a Form S-3 registration statement that we filed with the SEC. This prospectus provides you with a general description of the securities that may be offered for sale, but does not contain all of the information that is in the registration statement. To see more detail, you should read the entire registration statement and the exhibits filed with the registration statement. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The SEC allows us to "incorporate by reference" the information we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is an important part of this prospectus, and information that we file later with the SEC will automatically update and supersede this information. We incorporate by reference the documents listed below and any future filings made with the SEC under Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934 until all of the securities are sold. Our file number with the SEC is 0-27808. o Annual report on Form 10-K filed January 13, 1999, for the fiscal year ended September 30, 1998, as amended on Form 10-K/A filed October 7, 1999, o Proxy statement dated and filed January 28, 1999, o Quarterly report on Form 10-Q filed February 16, 1999, for the fiscal quarter ended December 31, 1998, as amended on Form 10-Q/A filed October 6, 1999, o Current report on Form 8-K filed March 24, 1999, o Quarterly report on Form 10-Q filed May 14, 1999, for the fiscal quarter ended March 31, 1999, as amended on Form 10-Q/A filed October 6, 1999, o Current report on Form 8-K filed July 7, 1999, relating to 1) the proposed sale of Covol's River Hill synthetic fuel facility, and 2) the proposed sale of substantially all of Covol's synthetic fuel business, o Quarterly report on Form 10-Q filed August 16, 1999, for the fiscal quarter ended June 30, 1999, as amended on Form 10-Q/A filed October 6, 1999, o Current report on Form 8-K filed September 13, 1999, related to the sale of Covol's River Hill synthetic fuel facility, as amended on Form 8-K/A filed September 28, 1999, and o Description of securities contained in Item 11 of Covol's Registration Statement on Form 10/A, Amendment No. 2 filed April 24, 1996. You may request a copy of these filings at no cost, by writing or telephoning us at the following address: Investor Relations Department Covol Technologies, Inc. 3280 North Frontage Road Lehi, Utah 84043 Telephone Number: (801) 768-4481 10 MATERIAL CHANGES The Company has experienced the following material events since the date of filing of its last Annual Report on Form 10-K, which have not previously been the subject of subsequent Quarterly Reports on Form 10-Q or Current Reports on Form 8-K: 1. Earthco Lease In February 1997, Covol entered into a contract with Earthco to acquire coal fines and to lease property allowing Covol to conduct fines recovery and preparation activities at a location near Wellington, Utah, approximately six miles from the Utah Synfuel plant site. The terms of the contract included an initial payment to Earthco upon execution of the contract and an agreement to acquire the fines and make quarterly payments through May 2000, with options to extend the contract or purchase the property. Covol entered into the contract based on the understanding that Earthco was the fee owner of the property and that there were in excess of 2 million tons of recoverable coal fines on the property. Subsequently, Covol learned that Nevada Electric Investment Company disputes that Earthco is the owner of the property, and that there may be substantially less than 2 million tons of recoverable fines on the property. Consequently, in August 1999, Covol notified Earthco that unless Earthco could procure and provide evidence that it could warrant title to the property and adjust contract payments to reflect the actual recoverable fines at the property, Covol may elect to terminate the contract and seek appropriate damages. On this basis, Covol has refused to make further quarterly payments to Earthco under the contract. Covol has previously made payments under the contract totaling $3,916,664 and the contract called for future quarterly payments totaling $1,583,732 through May 2000. Earthco has responded by denying Covol's claims and alleging issues of property reclamation and bonding, U.S. Department of Interior fees, and failed contract payment. Covol denies these allegations. The dispute is at an early stage and resolution is uncertain. However, if the matter is resolved adversely to Covol it could result in a reduction of Covol's recorded inventories in an amount up to $3,700,000. 2. Secured Convertible Debt On September 17, 1999, Covol entered into a financing arrangement with Aspen Capital Resources to provide up to $4 million of funding in the form of convertible secured debt. Covol can make draws under this arrangement as working capital is needed. Amounts drawn under this arrangement are convertible into Covol common stock at the lesser of $3.00 or current market rates at the time of conversion. The arrangement also requires issuance of warrants for the purchase of Covol common stock at an exercise price of $3.60 per share. The number of warrants issued is equal to 40% of the Covol common shares issuable pursuant to the actual convertible secured debt issued under this arrangement. Covol can redeem all outstanding debt under this arrangement at a rate equal to 125 % of the face value of the debt. Covol assigned royalties to be received from one of its licensed synthetic fuel facilities as collateral for this financing. Borrowings under this arrangement are due March 17, 2001, if not converted or redeemed earlier. 11 USE OF PROCEEDS The net proceeds from the sale of common stock will be received by the selling stockholders. Covol will not receive any of the proceeds from any sale of the shares by the selling stockholders. Some selling stockholders may acquire shares upon exercise of warrants and options. The exercise price of most warrants and options exceeds the market price of the common stock on the date of this prospectus. Any proceeds to Covol from the exercise of options or warrants will be used as working capital. SELLING STOCKHOLDERS The information in the table below is taken as of October 7, 1999. The amounts in the table assume full conversion of Series A, B and C preferred stock held by a selling stockholder and exercise of all warrants and options held by each selling stockholder. The selling stockholders listed in the table do not necessarily intend to sell any of their shares. Covol filed the registration statement which includes this prospectus partly due to registration rights granted to the selling stockholders, not because the stockholders had expressed an intent to immediately sell their shares.
Number of Shares Shares to be Shares Beneficially Owned Beneficially Owned Registered After the Offering, Prior to the Offering, for Sale in Assuming All Registered Name of Including Convertible the Shares Are Sold Beneficial Owner Securities Offering(1) Number Percent(2) - ----------------------------------------------------------------------------------------------------------------------- AJG Financial Services, Inc. (Lender, Licensee and former 5% 140,642 140,642 Stockholder) w432,544 w432,544 0 0 Alder, Susan 5,400 5,400 0 0 Allen, George J. & Roy G. 9,200 6,000 3,200 Less than 1% Anderson, Bennett & Rochelle 32,879 9,000 23,879 Less than 1% 72,467 72,467 Asia Orient Enterprises Ltd. w52,800 w52,800 0 0 Ayers, Alan D. (Former Officer 40,000 40,000 and Employee) w125,000 w125,000 0 0 12,650 12,650 Baildon Holdings Pty Limited w12,650 w12,650 0 0 Banyan Investment 98,496 58,000 40,496 Less than 1% Beesley, William B, Jr. 5,329 1,329 4,000 Less than 1% Beesley, Mark K 1,049 1,049 0 0 Benson, Kirk A. (Officer, Director 466,665 466,665 and 5% Stockholder) w355,555 w355,555 0 0 12 Number of Shares Shares to be Shares Beneficially Owned Beneficially Owned Registered After the Offering, Prior to the Offering, for Sale in Assuming All Registered Name of Including Convertible the Shares Are Sold Beneficial Owner Securities Offering(1) Number Percent(2) - ----------------------------------------------------------------------------------------------------------------------- 4,400 4,400 Black, Geoffrey w4,400 w4,400 0 0 60,000 60,000 Blackhawk Properties, LLC w60,000 w60,000 0 0 Bours Family Superannuation Fund 16,160 160 16,000 Less than 1% Bradshaw, Brett 1,200 200 1,000 Less than 1% Brannon, Anna T. 2,500 2,500 0 0 Bridgewater, Timothy A. (Broker) w10,000 w10,000 0 0 Busch, Lawrence R. 14,641 9,000 5,641 Less than 1% Bush, Neil M. w10,000 w10,000 0 0 Campbell & George, LLP (Broker) w30,000 w30,000 0 0 Cecala, Enrico 24,000 24,000 0 0 42,142 42,142 Chase, Michael H. w25,000 w25,000 0 0 Citano Pty Limited ATF G.N. 9,900 9,900 Willis Family Trust w9,900 w9,900 0 0 5,000 5,000 Connors, Tom w5,000 w5,000 0 0 11,000 11,000 Coralco Pty Limited w11,000 w11,000 0 0 Criddle, Mark & Jolynn 3,600 3,600 0 0 Dahl, Robert E. (Former 9,748 9,748 Employee) w30,000 w30,000 0 0 D'Ambrosio, Christianne 1,200 1,200 0 0 D'Ambrosio, Kara C. 6,000 6,000 0 0 D'Ambrosio, Louis J. 25,939 14,000 11,939 Less than 1% D'Ambrosio, Sue R. 6,000 6,000 0 0 Danks, Donald (Finder) 15,000 15,000 0 0 14,850 14,850 Davey, Miranda w14,850 w14,850 0 0 Diamond Jay Ltd. Co. (Lender to w85,713 w85,713 Covol) AP 428,571 AP 428,571 0 0 Emery, Robert R. 200 200 0 0 13 Number of Shares Shares to be Shares Beneficially Owned Beneficially Owned Registered After the Offering, Prior to the Offering, for Sale in Assuming All Registered Name of Including Convertible the Shares Are Sold Beneficial Owner Securities Offering(1) Number Percent(2) - ----------------------------------------------------------------------------------------------------------------------- 24,200 24,200 Foster, Craig H. w24,200 w24,200 0 0 Fun Enterprises Pty Limited 2,500 2,500 (Lender to Covol) w97,738 w97,738 0 0 Gronning, C. Eugene 2,000 2,000 0 0 5,500 5,500 G T Investments w5,500 w5,500 0 0 20,800 20,800 Hannes, Damien A. w16,500 w16,500 0 0 Hardcastle, Larry A. 400 400 0 0 Hardcastle, Lloyd A. 11,000 11,000 0 0 Harper, Prudence 11,000 11,000 w11,000 w11,000 0 0 Hartman, Douglas E. 18,000 18,000 0 0 Jensen, W. Reed 8,000 8,000 0 0 279,129 279,129 CP36,363 CP36,363 Johnson, Joe (Lender to Covol) w198,727 w198,727 0 0 Kamdar, Kiran 1,800 1,800 0 0 Kaufmann, Marjorie B., TTEE 24,041 8,400 15,641 Less than 1% Kelley, Steven P. 1,500 1,500 0 0 KGB Family Ltd. 400 400 0 0 Krueger, Siegfried 1,500 1,500 0 0 Lakeshore Securities, L.P. Profit Sharing Plan fbo Jeffrey T. Kaufmann 9,841 4,200 5,641 Less than 1% Lakeshore Securities, L.P. Profit Sharing Plan fbo Van V. Hemphill 7,020 4,200 2,820 Less than 1% Lambert, Richard (Former 44,450 44,450 Employee) w45,000 w45,000 0 0 Lanier, Judson & Joyce 9,000 9,000 0 0 Lowe, Raymond E. 18,000 18,000 0 0 McMullin, Garn (Broker) w10,000 w10,000 0 0 22,000 22,000 Merinda Controls Pty Limited w22,000 w22,000 0 0 14 Number of Shares Shares to be Shares Beneficially Owned Beneficially Owned Registered After the Offering, Prior to the Offering, for Sale in Assuming All Registered Name of Including Convertible the Shares Are Sold Beneficial Owner Securities Offering(1) Number Percent(2) - ----------------------------------------------------------------------------------------------------------------------- 6,500 5,500 Michelsen, F. Lynn w5,500 w5,500 1,000 Less than 1% Midgley, Michael (Former Officer) 124,923 108,000 16,923 Less than 1% Mills, Diana F. 12,120 9,300 2,820 Less than 1% 4,000 4,000 Mower, Clark w4,000 w4,000 0 0 22,000 22,000 Pacific Asset Investment Limited w22,000 w22,000 0 0 Olafson, Gregory 19,500 19,500 0 0 Pedersen, Kris (Former Employee) w3,000 w3,000 0 0 Perwick Holding Ltd. 36,000 36,000 0 0 Peterson, Mark (Broker, Finder) 18,000 18,000 0 0 Peterson, Nancy 3,000 3,000 0 0 Pillsbury, Taylor & Jill 600 600 0 0 Pitcher, Steven (Former Employee) w2,500 w2,500 0 0 BP 14,310 BP14,310 Pooley, John 7,300 7,300 0 0 Purmort, Andrew T. 4,500 4,500 0 0 4,400 4,400 Reflex Nominees Limited w4,400 w4,400 0 0 Risher, Donald (Former Employee) w22,500 w22,500 0 0 24,600 24,600 Roberts, John w17,600 w17,600 0 0 30,000 30,000 September Corporation w30,000 w30,000 0 0 Sherbak, Ronald (Former w35,000 w35,000 0 0 Employee) 6,500 4,000 Smith, Edward L. w4,000 w4,000 2,500 0 26,000 26,000 0 0 Smith, Robert A. w26,000 w26,000 Sorensen, Asael T., Jr. (Former 54,450 54,450 Officer and Employee) w115,000 w115,000 0 0 Sowby, James & Teri 3,600 3,600 0 0 15 Number of Shares Shares to be Shares Beneficially Owned Beneficially Owned Registered After the Offering, Prior to the Offering, for Sale in Assuming All Registered Name of Including Convertible the Shares Are Sold Beneficial Owner Securities Offering(1) Number Percent(2) - ----------------------------------------------------------------------------------------------------------------------- 11,358 11,358 Stamford Holdings (Finder) w25,819 w25,819 0 0 Stapleton, James P. 6,000 6,000 0 0 Steel Number 4 Investments 20,900 20,900 Limited w20,900 w20,900 0 0 S&N Partnership 9,000 5,000 4,000 Less than 1% Todd, Michael J. (Former Officer) w50,000 w50,000 0 0 Trans Pacific Stores (Lender, affiliated with a director) w100,000 w100,000 0 0 Turnbow, Lynn 11,119 2,000 9,119 Less than 1% Vanderhoof, Mike (Finder) 41,282 30,000 11,282 Less than 1% Whisper Investment (Finder) 32,273 13,400 18,873 Less than 1% Wolt, Eddie, IRA 2,500 2,500 0 0 Wolt, Linda, IRA 5,500 5,500 0 0 Wolt, Scott 10,000 10,000 0 0 Wright, Nicholas H. (Majority 245,425 245,425 Owner of Fun Enterprises Pty Ltd, w20,000 w20,000 0 0 a Lender to Covol) 4,000 4,000 Wright, Stephen w4,000 w4,000 0 0 - --------------------------------------- --------------------------- ---------------- ---------------- ---------------
(1) This column indicates shares of common stock; shares issuable on exercise of warrants and options by the letter "w," shares issuable upon conversion of Series A preferred stock by the letters "AP," shares issuable upon conversion of Series B preferred stock by the letters "BP," and shares issuable upon conversion of Series C preferred stock by the letters "CP." (2) Indicates the percentage of Covol's common stock outstanding, assuming conversion of convertible securities and exercise of warrants and options by the indicated selling stockholders. This prospectus applies to the offer and sale by the selling stockholders of our common stock. The shares being offered for sale include 2,290,914 shares currently owned by the selling stockholders, plus 2,217,296 shares obtainable by exercising warrants and options, and approximately 479,244shares obtainable by converting the Series A preferred stock, Series B preferred stock and Series C preferred stock which they owned as of the date of this prospectus. Each share of the Series A preferred stock is convertible into a number of shares of common stock determined by dividing the original purchase price of $1,000 per preferred share, plus accrued dividends, by $7.00. Dividends on any Series A preferred stock accrue at 6% per year. There are 3,000 shares of Series A preferred stock outstanding. 16 Each share of the Series B preferred stock is convertible into a number of shares of common stock determined by dividing the original purchase price of $7.00 per preferred share, plus accrued dividends, by $7.00. Dividends on any Series B preferred stock accrued at 7.29% per year from September 18, 1997 through March 17, 1998, and accrued at 7.03% per year beginning March 18, 1998. There are 14,310 shares of Series B preferred stock outstanding. Approximately 90% of the Series B preferred stock along with the related accrued dividends, was converted into 308,425 shares of common stock during October 1998. Each share of the Series C preferred stock is convertible into a number of shares of common stock determined by dividing the original purchase price of $1,000 per preferred share, plus accrued dividends, by $5.50, subject to adjustment for a decrease in market price of Covol's common stock. Dividends on any Series C preferred stock accrue at 7% per year. There are 200 shares of Series C preferred stock outstanding. If the outstanding Series A, B and C preferred stock were converted into common stock, the total number of shares of common stock issued on conversion would be approximately 479,244 shares. The actual number of shares may be more than this amount depending upon the amount of dividends which accrue on the preferred stock prior to conversion into common stock. The conversion price for each class of preferred stock is subject to anti-dilution adjustment. PLAN OF DISTRIBUTION The selling stockholders may sell some or all of their shares at any time and in any of the following ways. They may sell their shares: o To underwriters who buy the shares for their own account and resell them in one or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices determined at the time of sale. Any public offering price and any discount or concessions allowed or reallowed or paid to dealers may be changed from time to time; o Through brokers, acting as principal or agent, in transactions, which may involve block transactions, on the Nasdaq Stock Market(sm) or on other exchanges on which the shares are then listed, in special offerings, exchange distributions pursuant to the rules of the applicable exchanges or in the over-the-counter market, or otherwise, at market prices prevailing at the time of sale, at prices related to such prevailing market prices, at negotiated prices or at fixed prices; o Directly or through brokers or agents in private sales at negotiated prices; or o In open market transactions in reliance upon rule 144 under the Securities Act, provided they comply with the requirements of the rule; or o By any other legally available means. Selling stockholders may pay part of the proceeds from the sale of shares in commissions and other compensation to underwriters, dealers, brokers or agents who participate in the sales. Some states may require shares to be sold only through registered or licensed brokers or dealers. In addition, some states may require the shares to be registered or qualified for sale unless an exemption from registration or qualification is available and complied with. We have agreed to indemnify some of the selling stockholders against liabilities under the Securities Act, or to contribute to payments the selling stockholders may be required to make under the Securities Act. LEGAL MATTERS The law firm of Callister Nebeker & McCullough, Salt Lake City, Utah, has rendered an opinion as to the validity of the shares offered under this prospectus. 17 EXPERTS The consolidated financial statements incorporated in this prospectus by reference to the annual report on Form 10-K/A for the fiscal year ended September 30, 1998, have been so incorporated in reliance upon the report, which includes an explanatory paragraph relating to the restatement of the 1998 and 1997 financial statements, of PricewaterhouseCoopers LLP, independent accountants, given upon the authority of said firm as experts in auditing and accounting. PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 14. Other Expenses of Issuance and Distribution. The following is a list of the estimated expenses to be incurred by the Registrant in connection with the issuance and distribution of the Shares being registered hereby. SEC Registration Fee...................................... $ 8,972.64 Accountants' Fees and Expenses............................ $ 100,000.00 Legal Fees and Expenses................................... $150,000.00 Miscellaneous............................................. $10,000.00 ------------ TOTAL................................................ $268,972.64 Item 15. Indemnification of Directors and Officers. Section 145 of the General Corporation Law of the State of Delaware allows us to indemnify our officers, directors, employees and agents, as well as persons who have served in these capacities for other corporations at our request, for reasonable costs and expenses associated with civil and criminal suits related to their services in these capacities. The indemnification applies to civil cases arising from acts made in good faith, reasonably believing that they were in the best interests of the corporation. It may also apply to criminal cases if the person had no reason to believe his conduct was unlawful. In some cases, the availability of indemnification may be up to the discretion of the court in which the suit was brought. The Registrant's Certificate of Incorporation, as amended, has the following indemnification provisions: This Corporation shall indemnify and shall advance expenses on behalf of its officers and directors to the fullest extent not prohibited by law in existence either now or hereafter. The Registrant's By-laws similarly provide that the Registrant shall indemnify its officers and directors to the fullest extent permitted by the Delaware Law. 18 Item 16. Exhibits. Exhibit Number Description Location 2.1 Agreement and Plan of Reorganization, dated (1) July 1, 1993 between the Registrant and the Stockholders of R1001 2.2 Agreement and Plan of Merger dated August 14, 1995 (1) between the Registrant and Covol Technologies, Inc., a Delaware corporation 2.3 Stock Purchase Agreement, dated July 1, 1993, among (1) the Registrant, Lloyd C. McEwan, Michael McEwan, Dale F. Minnig and Ted C. Strong regarding the purchase of Industrial Management & Engineering, Inc. and Central Industrial Construction, Inc. 2.4 Stock Sale Transaction Documentation, effective as (1) of September 30, 1994, between the Registrant and Farrell F. Larson regarding Larson Limestone Company, Inc. 2.5 Stock Purchase Agreement dated February 1, 1996 by (1) and among the Registrant, Michael McEwan and Gerald Larson regarding the sale of State, Inc., Industrial Engineering & Management, Inc., Central Industrial Construction, Inc., and Larson Limestone Company, Inc. 2.5.1 Amendment to Share Purchase Agreement regarding the (1) sale of the Construction Companies 2.5.2 Amendment No. 2 to Share Purchase Agreement regarding (2) the sale of the Construction Companies 3.1 Certificate of Incorporation of the Registrant (1) 3.1.1 Certificate of Amendment of the Certificate of (1) Incorporation of the Registrant dated January 22, 1996 3.1.2 Certificate of Amendment of the Certificate of (3) Incorporation dated June 25, 1997 3.1.3 Certificate of Designation, Number, Voting Powers, (4) Preferences and Rights of the Registrant's Series A 6% Convertible Preferred Stock (Originally designated as Exhibit No. 3.1.2) 3.1.4 Certificate of Designation, Number, Voting Powers, (5) Preferences and Rights of the Registrant's Series B Convertible Preferred Stock (Originally designated as Exhibit No. 3.1.3) 3.1.5 Certificate of Designation, Number, Voting Powers, (8) Preferences and Rights of Covol's Series C 7% Convertible Preferred Stock. 19 3.1.6 Certificate of Designations, Number, Voting Powers, (9) Preferences and Rights of the Series of the Preferred Stock of Covol Technologies, Inc. to be Designated Series D 7% Cumulative Convertible Preferred Stock. 3.2 By-Laws of the Registrant (1) 3.2.1 Certificate of Amendment to Bylaws of the Registrant (1) dated January 31, 1996 3.2.2 Certificate of Amendment to the Bylaws dated May 20, 1997 (3) (Originally designated as Exhibit No. 3.2.1) 3.2.3 Certificate of Amendment to the Bylaws dated June 25, (3) 1997 (Originally designated as Exhibit No. 3.2.2) 4.1 Promissory Note between Covol and Mountaineer Synfuel, (6) L.L.C. dated May 5, 1998 (filed as Exhibit 10.52.2 to the filing referenced in the next column) 4.2 Promissory Note dated December 8, 1998 of Covol to (7) Mountaineer Synfuel, L.L.C. (filed as Exhibit 10.52.4 to the filing referenced in the next column) 4.3 Security Agreement dated December 8, 1998 between (7) Mountaineer Synfuel, L.L.C. and Covol (filed as Exhibit 10.52.5 to the filing referenced in the next column) 4.4 Convertible Secured Note executed by Covol in favor (9) of OZ Master Fund, Ltd., dated as of March 17, 1999 (filed as exhibit 10.58.1 to the filing referenced in the next column) 5.1 Opinion of Callister Nebeker & McCullough regarding * legality of shares 10.1 Securities Purchase Agreement dated September 17, 1999 * between Aspen Capital Resources, L.L.C. and Covol 10.2 Security Agreement dated September 17, 1999 between * Aspen Capital Resources, L.L.C. and Covol 23.1 Consent of PricewaterhouseCoopers LLP * 24.1 Power of Attorney (included in Part II of this Registration Statement) - ------------------------ * Attached hereto. Unless another exhibit number is indicated as the exhibit number for the exhibit as "originally filed," the exhibit number in the filing in which any exhibit was originally filed and to which reference is made hereby is the same as the exhibit number assigned herein to the exhibit. (1) Incorporated by reference to the indicated exhibit filed with the Registrant's Registration Statement on Form 10, filed February 26, 1996. (2) Incorporated herein by reference to the indicated exhibit filed with the Registrant's Registration Statement on Form 10/A, Amendment No. 2, dated April 24, 1996. 20 (3) Incorporated by reference to the indicated exhibit filed with the Registrant's Quarterly Report on Form 10-Q, for the quarterly period ended June 30, 1997. (4) Incorporated by reference to the indicated exhibit filed with the Registrant's Current Report on Form 8-K, dated August 19, 1997. (5) Incorporated by reference to the indicated exhibit filed with the Registrant's Current Report on Form 8-K, for event dated September 18, 1997, filed October 28, 1997. (6) Incorporated by reference to the indicated exhibit filed with the Registrant's Quarterly Report on Form 10-Q, for the quarterly period ended June 30, 1998. (7) Incorporated by reference to the indicated exhibit filed with the Registrant's Annual Report on Form 10-K, for the fiscal year ended September 30, 1998. (8) Incorporated by reference to the indicated exhibit filed with the Registrant's Quarterly Report on Form 10-Q, for the quarterly period ended December 31, 1998. (9) Incorporated by reference to the indicated exhibit filed with the Registrant's Current Report on Form 8-K, for event dated March 17, 1999, filed on March 24, 1999. Item 17. Undertakings. A. The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as amended (the "Act"); (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; provided, however, that paragraphs (A)(1)(i) and (A)(1)(ii) do not apply if the Registration Statement is on Form S-3, Form S-8 or Form F-3, and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Securities and Exchange Commission (the "Commission") by the Registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are incorporated by reference in the Registration Statement. (2) That, for the purpose of determining any liability under the Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. B. The undersigned Registrant hereby undertakes that for purposes of determining any liability under the Act, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 21 15(d) of the Exchange Act (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. C. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. D. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon rule 430A and contained in a form of prospectus filed by the Registrant pursuant to rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. [INTENTIONALLY LEFT BLANK] 22 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Salt Lake City, State of Utah on October 7, 1999 COVOL TECHNOLOGIES, INC. By: [/s/] Kirk A. Benson ------------------------------------ Chief Executive Officer, Chairman Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below in so signing also makes, constitutes and appoints Harlan M. Hatfield and Stanley M. Kimball and each of them, as true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities to execute and cause to be filed with the Securities and Exchange Commission any and all amendments (including pre-effective and post-effective amendments) to this Registration Statement, with exhibits thereto and other documents in connection therewith, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully as to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all that said attorneys-in-fact and agents or their or his substitute or substitutes may lawfully do or cause to be done by virtue hereof. Signature Title Date [/s/] Kirk A. Benson Chief Executive Officer and October 7, 1999 - -------------------------- Director Name [/s/] Brent M. Cook President and Director October 7, 1999 - -------------------------- Name [/s/] Steven G. Stewart Chief Financial and Accounting October 7, 1999 - -------------------------- Officer Name [/s/] DeLance W. Squire Director October 7, 1999 - -------------------------- Name [/s/] James A. Herickhoff Director October 7, 1999 - -------------------------- Name [/s/] Raymond J. Weller Director October 7, 1999 - -------------------------- Name [/s/] John P. Hill, Jr. Director October 7, 1999 - -------------------------- Name 23 EX-5.1 2 LEGAL OPINION CALLISTER NEBEKER & McCULLOUGH A PROFESSIONAL CORPORATION ATTORNEYS AT LAW GATEWAY TOWER EAST SUITE 900 10 EAST SOUTH TEMPLE SALT LAKE CITY, UTAH 84133 TELEPHONE 801-530-7300 FAX 801-364-9127 October 7, 1999 Covol Technologies, Inc. 3280 North Frontage Road Lehi, Utah 84043 Re: Registration Statement on Form S-3 of Covol Technologies, Inc. Ladies and Gentlemen: We have acted as counsel to Covol Technologies, Inc., a Delaware corporation (the "Company"), in connection with the Registration Statement on Form S-3 of the Company, SEC File No. 333-67371 filed on November 16, 1998, as amended pursuant to Amendment No. 3, to which this opinion is attached as Exhibit 5.1 (the "Registration Statement"), with the Securities and Exchange Commission (the "Commission"). The Registration Statement relates to 5,149,358 shares (the "Shares") of common stock of the Company, par value $.001 per share (the "Common Stock") including (i) 2,449,913 shares of Common Stock currently issued and outstanding and owned by certain persons listed in the Registration Statement as selling stockholders (the "Selling Stockholders"), (ii) 2,129,291 shares of Common Stock issuable to certain of the Selling Stockholders by the Company upon exercise of Common Stock purchase warrants and options for purchase of Common Stock (collectively "Warrants") issued by the Company, (iii) 428,571 shares of Common Stock issuable by the Company to certain of the Selling Stockholders upon conversion of the Company's Series A 6% Convertible Preferred Stock ("Series A Preferred"), (iv) 14,310 shares of Common Stock issuable by the Company to certain of the Selling Stockholders upon conversion of the Company's Series B Convertible Preferred Stock ("Series B Preferred"), and (v) 127,273 shares of Common Stock issuable by the Company to certain of the Selling Stockholders upon conversion of the Company's Series C 7% Convertible Preferred Stock ("Series C Preferred"), to be offered for sale by the Selling Stockholders of the Company as described in the prospectus included in the Registration Statement. This opinion is an exhibit to the Registration Statement, and is being furnished to you in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended (the "1933 Act"). In that capacity, we have reviewed the Registration Statement and originals, or copies certified or otherwise identified to our satisfaction, of other documents, corporate records, certificates and other instruments as we have deemed necessary or appropriate for purposes of this opinion. In such examination, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity of all documents submitted to us as certified, conformed or photostatic copies and the authenticity of the originals of such documents. In making our examination of documents executed by parties other than the Company, we have assumed that such parties had the power, corporate or other, to enter into and perform all obligations thereunder and have also assumed the due authorization by all requisite action, corporate or other, and execution and delivery by such parties of such documents and the validity, binding effect and enforceability thereof. As to any facts material to the opinions expressed herein, we have, to the extent we deemed appropriate, relied upon statements and representations of officers and other representatives of the Company and others. Our opinions expressed herein are limited to the corporate law of the State of Delaware, and we do not express any opinion herein concerning any other law. Based upon and subject to the foregoing, and to the limitations, qualifications, exceptions and assumptions set forth herein, we are of the opinion that (i) the shares of Common Stock currently outstanding and owned by certain of the Selling Stockholders and being registered on the Registration Statement have been duly authorized and legally issued, and are fully paid and non-assessable, (ii) the shares of Common Stock being registered on the Registration Statement to be issued by the Company to certain of the Selling Stockholders upon exercise of the Warrants have been duly authorized and, when sold to the Selling Stockholders and paid for in the manner provided in the Registration Statement and the various agreements and instruments governing the Warrants of the Selling Stockholders and the Company, will be legally issued, fully paid and non-assessable, (iii) the shares of Common Stock being registered on the Registration Statement to be issued by the Company to certain Selling Stockholders upon conversion of the Series A Preferred, the Series B Preferred, and the Series C Preferred have been authorized and, when issued to the Selling Stockholders upon conversion of the Series A Preferred, the Series B Preferred, or the Series C Preferred, will be legally issued, fully paid and non-assessable. In rendering this opinion, we have assumed that (i) the certificates representing the Shares will conform to the form of specimen examined by us and such certificates will be duly executed and delivered by the Company; (ii) the consideration for Shares as provided in the applicable resolutions of the Board of Directors of the Company has been actually received by the Company as provided therein. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to us under the caption "Legal Matters" in the Prospectus. In giving this consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the 1933 Act or the rules and regulations of the Commission promulgated thereunder. Very truly yours, /s/CALLISTER NEBEKER & McCULLOUGH EX-10.1 3 ASPEN SECURITIES PURCHASE AGREEMENT COVOL TECHNOLOGIES, INC. SECURITIES PURCHASE AGREEMENT Dated as of September 17, 1999 TABLE OF CONTENTS Page Article I - DEFINITIONS.....................................................1 1.1 Definitions; Interpretation...................................1 Article II - ISSUANCE AND SALE OF THE SECURITIES............................7 2.1 Authorization of the Securities...............................7 2.2 Issuance and Sale of the Securities...........................8 2.3 Additional Issuances and Sales of the Securities..............8 2.4 Option to Acquire Additional Securities.......................9 Article III - CLOSING; CLOSING DELIVERIES...................................9 3.1 Closing.......................................................9 3.2 Payment for and Delivery of the Securities....................9 Article IV - REPRESENTATIONS AND WARRANTIES OF THE COMPANY.................10 4.1 Existence; Qualification; Subsidiaries.......................10 4.2 Authorization and Enforceability; Issuance of the Securities, the Conversion Shares and the Warrant Shares....10 4.3 Capitalization...............................................11 4.4 Private Sale.................................................12 4.5 Financial Statements; Disclosure.............................12 4.6 Absence of Certain Changes...................................13 4.7 Litigation...................................................14 4.8 Licenses, Compliance with Law, Other Agreements, Etc.......14 4.9 Third-Party Approvals........................................15 4.10 No Undisclosed Liabilities..................................15 4.11 Tangible Assets.............................................15 4.12 Inventory...................................................15 4.13 Owned Real Property.........................................15 4.14 Real Property Leases........................................15 4.15 Agreements..................................................16 4.16 Intellectual Property.......................................16 4.17 Employees...................................................17 4.18 ERISA; Employee Benefits....................................17 4.19 Environmental Laws..........................................17 4.20 Transactions With Affiliates..............................18 4.21 Taxes.......................................................18 4.22 Other Investors.............................................19 4.23 Year 2000 Representations..................................19 4.24 Investment Company.........................................19 i 4.25 Certain Fees................................................19 4.26 Solicitation Materials.....................................20 4.27 Form S-3 Filing............................................20 4.28 Listing and Maintenance Requirements Compliance.............20 4.29 Registration Rights; Rights of Participation................20 4.30 Synthetic Fuel Facilities...................................20 Article V - REPRESENTATIONS AND WARRANTIES OF THE PURCHASER................21 5.1 Authorization and Enforceability.............................21 5.2 Purchaser's Ability to Perform...............................21 5.3 Restrictions on Sale.........................................21 Article VI - COMPLIANCE WITH SECURITIES LAWS...............................22 6.1 Investment Intent of the Purchaser..........................22 6.2 Status of Securities........................................22 6.3 Accredited Investor Status..................................22 6.4 Access to Information.......................................22 6.5 Transfer of Securities, Conversion Shares and Warrant Shares.......................................................23 Article VII - CONDITIONS PRECEDENT.........................................23 7.1 Conditions Precedent........................................23 Article VIII - COVENANTS OF THE COMPANY....................................26 8.1 Restricted Actions..........................................26 8.2 Required Actions............................................27 8.3 Reservation of Common Stock..................................29 8.4 Payments Free of Withholding.................................30 Article IX - REGISTRATION RIGHTS...........................................30 9.1 Registration Rights..........................................30 9.2 Piggyback Registration Rights................................30 Article X - SURVIVAL.......................................................31 10.1 Survival....................................................31 Article XI - INDEMNIFICATION...............................................31 11.1 Indemnification.............................................31 Article XII - GENERAL PROVISIONS...........................................32 12.1 Successors and Assigns......................................32 12.2 Entire Agreement...........................................32 12.3 Notices.....................................................32 12.4 Purchaser Fees and Expenses.................................33 ii 12.5 Amendment and Waiver.......................................34 12.6 Counterparts................................................34 12.7 Headings....................................................34 12.8 Remedies Cumulative........................................34 12.9 GOVERNING LAW...............................................34 12.10 CONSENT TO JURISDICTION; SERVICE OF PROCESS AND VENUE.....34 12.11 No Third Party Beneficiaries...............................35 12.12 Severability...............................................35 iii SECURITIES PURCHASE AGREEMENT SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of September 17, 1999, by and between COVOL TECHNOLOGIES, INC.(the "Company"), a Delaware corporation with an address at 3280 North Frontage Road, Lehi, Utah 84043; and ASPEN CAPITAL RESOURCES, LLC or its assigns (the "Purchaser"), a Utah limited liability company with an address at 8989 South Schofield Circle, Sandy, Utah 84093. The Company desires to issue to the Purchaser and the Purchaser desires to purchase from the Company, upon the terms and subject to the conditions set forth herein (i) the Convertible Secured Debentures of the Company and (ii) the Warrants. In consideration of the mutual promises, representations, warranties, covenants and conditions set forth in this Agreement, the parties hereto agree as follows: Article I - DEFINITIONS 1.1 Definitions; Interpretation. For purposes of this Agreement, the following terms have the indicated meanings: "Affiliate" of a Person means any officer, director or employee of the Company and any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with such Person. For purposes of this definition, "control" of a Person means the power, directly or indirectly, either to (i) vote 10% or more of the Capital Stock having ordinary voting power for the election of directors of such Person or (ii) direct or cause the direction of the management and policies of such Person whether by contract or otherwise. "Capital Stock" of any Person shall mean any and all shares, interests (including membership and economic interests in a limited liability company), rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) equity of such Person, but excluding any debt securities convertible into such equity prior to such conversion. "Capitalized Lease" means any lease which is required under GAAP to be capitalized on the balance sheet of the lessee. "Capitalized Lease Obligation" means obligations for the payment of rent for any Capitalized Lease; for purposes hereof, the amount of any such obligation shall be the capitalized amount thereof determined in accordance with GAAP. "CERCLA" shall mean the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended. "Code" means the Internal Revenue Code of 1986, as amended. "Common Stock" means, collectively, the Company's Common Stock, $.001 par value per share, and any Capital Stock of any class of the Company hereafter authorized which is not limited to a fixed sum or percentage of par or stated value in respect to the rights of the holders thereof to participate in dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Company. "Confidential Information" means any proprietary information concerning the Company's business other than information that (i) was already known to the Person having a duty to keep confidential such information on a nonconfidential basis prior to the time of disclosure, (ii) is or becomes generally available to the public through no act or omission of such Person or (iii) becomes available to such Person on a nonconfidential basis from a source other than any party hereto (or any agent or representative thereof) if such source was not under a prohibition against disclosing the information or otherwise bound by a confidentiality agreement with respect thereto. "Conversion Shares" means shares of Common Stock issued or issuable upon conversion of the Debentures, whether or not a Debenture is presently convertible; provided, that if there is a change such that the securities issuable upon conversion of the Debentures are issued by an entity other than the Company or there is a change in the securities so issuable, then the term "Conversion Shares" shall mean shares or the security issuable upon conversion of the Debentures if such securities are issuable in shares, or shall mean the equivalent units in which such security is issuable if such security is not issuable in shares. "Current Balance Sheet" means the unaudited balance sheet of the Company as at June 30, 1999. "Debentures" has the meaning set forth in Section 2.1. "Employee Plan" means an employee benefit plan (other than a Multiemployer Plan) covered by Title IV of ERISA and any employee benefit plan as defined in Section 3(3) of ERISA, maintained or contributed to by the Company, or any predecessor or Subsidiary or any ERISA Affiliate at any time during the 5-calendar years immediately preceding the date of this Agreement. 2 "Environmental Actions" refers to any complaint, summons, citation, notice, directive, order, claim, litigation, investigation, judicial or administrative proceeding, judgment, letter or other communication from any governmental agency, department, bureau, office or other authority, or any third party involving violations of Environmental Laws or Releases of Hazardous Materials (i) from any assets, properties or businesses of the Company or any of its Subsidiaries, licensees or predecessors in interest; (ii) from adjoining properties or business; or (iii) from or onto any facilities which received Hazardous Materials generated by the Company or any of its Subsidiaries, licensees or predecessors in interest. "Environmental Law" means the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. ss. 9601, et seq.), the Hazardous Materials Transpiration Act (49 U.S.C. 42 ss. 1801, et seq.), the Resource Conservation and Recovery Act (42 U.S.C. ss. 6901, et seq.), the Federal Water Pollution Control Act (33 U.S.C. ss. 1251, et seq.), the Clean Air Act (42 U.S.C. ss. 7401, et seq.), the Toxic Substances Control Act (15 U.S.C. ss. 2601, et seq.) and the Occupational Safety and Health Act (29 U.S.C. ss. 651 et seq.), as such laws may be amended or supplemented from time to time, and any other present or future federal (United States or Canada), state, provincial, local or foreign statute, ordinance, rule, regulation, order, judgment, decree, permit, license or other binding determination of any Governmental Agency imposing liability or establishing standards of conduct for protection of the environment. "Environmental Liabilities and Costs" means all liabilities (including strict liabilities), monetary obligations, Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including all reasonable out-of-pocket fees, disbursements and expenses of counsel, out-of-pocket expert and consulting fees, and out-of-pocket costs for environmental site assessments, remedial investigations and feasibility studies), fines, penalties, sanctions and interest incurred as a result of any Environmental Action filed by any Governmental Agency or any third party, which relate to any violations of Environmental Laws, Remedial Actions, Releases or threatened Releases of Hazardous Materials from or onto (i) any property presently or formerly owned by the Company or any of its Subsidiaries, licensees or predecessors in interest or (ii) any facility which received Hazardous Materials generated by the Company or any of its Subsidiaries, licensees or predecessors in interest. "Environmental Lien" means any Lien in favor of any Governmental Agency for Environmental Liabilities and Costs. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute of similar import, and regulations thereunder in each case as in effect from time to time. References to sections of ERISA shall be construed also to refer to any successor sections. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Existing Indebtedness" has the meaning set forth in Section 4.2. "Facilities" has the meaning set forth in Section 4.30. 3 "Fair Market Value" means the closing bid price of a share of Common Stock quoted on the NASDAQ Stock Market System. "Family Group" means, with respect to an individual Purchaser, such Purchaser, such Purchaser's spouse, siblings, descendants and/or ancestors (whether natural, by marriage or adopted) and any trust solely for the benefit of such Purchaser and/or such Purchaser's spouse, siblings, their respective ancestors and/or descendants (whether natural, by marriage or adopted). "Financial Statements" means (i) the unaudited balance sheets of the Company as at December 31, 1998 and 1997, March 31, 1999 and 1998, and June 30, 1999 and 1998, and the related unaudited statements of income and consolidated cash flow for the quarterly periods then ended, and (ii) the audited balance sheets of the Company as at September 30, 1998 and 1997, and the related audited statements of income and consolidated cash flow for the fiscal year periods then ended, all as filed with the Securities and Exchange Commission on the date of this Agreement. "GAAP" means United States generally accepted accounting principles as in effect from time to time, consistently applied. "Governmental Agency" means any federal, state, local, foreign or other governmental agency, instrumentality, commission, authority, board or body and the National Association of Securities Dealers. "Hazardous Materials" includes (a) any element, compound or chemical that is defined, listed or otherwise classified as a contaminant, pollutant, toxic pollutant, toxic or hazardous substance, extremely hazardous substance or chemical, hazardous waste, special waste, or solid waste under Environmental Laws; (b) petroleum and its refined products; (c) poly-chlorinated biphenyls; (d) any substance exhibiting a hazardous waste characteristic, including but not limited to corrosivity, ignitability, toxicity or reactivity as well as any radioactive or explosive materials; and (e) any raw materials, building components, including but not limited to asbestos-containing materials and manufactured products containing hazardous substances. "Hedging Agreement" means any interest rate swap, collar, cap, floor or forward rate agreement or other agreement regarding the hedging of interest rate risk exposure executed in connection with hedging the interest rate exposure of the Company, and any confirming letter executed pursuant to such agreement, all as amended, supplemented, restated or otherwise modified from time to time. "includes" and "including" mean includes and including, without limitation. 4 "Indebtedness" means, without duplication, as to any Person (i) indebtedness for borrowed money; (ii) indebtedness for the deferred purchase price of property or services (other than current trade payables incurred in the ordinary course of business and payable in accordance with customary practices); (iii) indebtedness evidenced by bonds, notes, debentures or other similar instruments (other than performance, surety and appeal or other similar bonds arising in the ordinary course of business); (iv) obligations and liabilities secured by a Lien upon property owned by such Person, whether or not owing by such Person and even though such Person has not assumed or become liable for the payment thereof; (v) obligations and liabilities directly or indirectly guaranteed by such Person; (vi) obligations or liabilities created or arising under any conditional sales contract or other title retention agreement with respect to property used and/or acquired by such Person, even though the rights and remedies of the lessor, seller and/or lender thereunder are limited to repossession of such property; (vii) Capitalized Lease Obligations; (viii) all liabilities in respect of letters of credit, acceptances and similar obligations created for the account of such Person; (ix) net liabilities of such Person under Hedging Agreements and foreign currency exchange agreements, as calculated on a basis satisfactory to the Purchaser and in accordance with accepted practice; and (x) the Debentures issued hereunder valued at the Optional Redemption Price (as defined in the Debentures) for purposes hereof. "Initial Closing" and "Additional Closing" have the meanings set forth in Section 3.1. "Initial Closing Date" and "Additional Closing Dates" have the meanings set forth in Section 3.1. "Intellectual Property" means all domestic and foreign patents, patent applications, disclosures, industrial designs, discoveries and inventions; trademarks, service marks, trade dress, trade names, d/b/a's, Internet domain names and corporate names and all goodwill associated therewith; published and unpublished works of authorship, copyrights; registrations, applications and renewals for any of the foregoing; trade secrets, Confidential Information, know-how, technical and computer data, databases, proprietary information, documentation and software, financial, business and marketing plans, customer and supplier lists and all other intellectual property and proprietary rights; and all copies and tangible embodiments of the foregoing. "IRS" means the Internal Revenue Service. "knowledge" or "know" when used with respect to the Company means the knowledge of the senior management (vice president or senior) of the Company, or any other management personnel that has had significant involvement in the business and affairs of the Company. "Liability" means any liability or obligation (whether absolute or contingent, liquidated or unliquidated or due or to become due). 5 "Lien" means any mortgage, deed of trust, pledge, lien, security interest, charge, encumbrance, security arrangement, restriction, covenant, encroachment or other title imperfection of any nature whatsoever, including but not limited to any conditional sale or title retention arrangement, and any assignment, deposit arrangement or lease intended as, or having the effect of, security. "Material Adverse Change" means any material adverse change in the business, condition (financial or otherwise), prospects or results of operations of the Company and its Subsidiaries taken as a whole. "Material Adverse Effect" means any material adverse effect on (i) the business, condition (financial or otherwise), prospects or results of operations of the Company and its Subsidiaries taken as a whole, or (ii) any of the transactions contemplated hereby or by the Related Documents. "ordinary course of business" means the ordinary course of business of the Company consistent with past practice (including with respect to quantity, quality and frequency). "Permitted Liens" has the meaning set forth in Section 8.1(l). "Person" means any individual, partnership, joint venture, corporation, trust, unincorporated organization or other entity. "RCRA" shall mean the federal Resource Conservation and Recovery Act, as amended. "Related Documents" means all documents and instruments to be executed or adopted by the Company in connection herewith, including without limitation each of the Debentures, the Security Agreement, each of the Warrants and all other documents and instruments to be executed or adopted by the Company pursuant thereto. "Release" means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, seeping, migrating, dumping or disposing of any Hazardous Material (including the abandonment or discarding of barrels, containers and other closed receptacles containing Hazardous Materials) into the indoor or outdoor environment, including ambient air, soil, surface or ground water. 6 "Remedial Action" means all actions taken to (i) clean up, remove, remediate, contain, treat, monitor, assess, evaluate or in any other way address Hazardous Materials in the indoor or outdoor environment; (ii) prevent or minimize a Release or threatened Release of Hazardous Materials so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment; (iii) perform pre-remedial studies and investigations and post-remedial operation and maintenance activities; or (iv) any other actions authorized by 42 U.S.C. 9601. "SEC" means the Securities and Exchange Commission. "Securities" has the meaning given that term in Section 2.1. "Securities Act" means the Securities Act of 1933, as amended. "Security Agreement" means the Security Agreement by and between the Company and the Purchaser, substantially in the form attached as Exhibit "A" hereto. "Subsidiary" means any corporation, partnership, association or other business entity of which (i) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by the Company or (ii) if a partnership, association or other business entity, a majority of the partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by the Company. For purposes hereof, the Company shall be deemed to have a majority ownership interest in a partnership, association or other business entity if the Company, directly or indirectly, is allocated a majority of partnership, association or other business entity gains or losses, or is or controls the managing director or general partner of such partnership, association or other business entity. "Tax" means any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Code ss.59A), customs duties, Capital Stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not. "Tax Returns" means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. "Warrant Shares" means shares of the Common Stock obtained or obtainable upon exercise of the Warrants, whether or not a Warrant is presently exercisable; provided, that if there is a change such that the securities issuable upon exercise of the Warrants are issued by an entity other than the Company or there is a change in the class of securities so issuable, then the term "Warrant Shares" shall mean shares of the security issuable upon exercise of the Warrants if such security is issuable in shares, or shall mean the equivalent units in which such security is issuable if such security is not issuable in shares. 7 Article II - ISSUANCE AND SALE OF THE SECURITIES 2.1 Authorization of the Securities. The Company has authorized the issuance and sale to the Purchaser, on the terms and subject to the conditions of this Agreement, of (a) its Convertible Secured Debentures in an aggregate principal amount of up to $4,000,000 and containing the terms and conditions and in the form of the Debenture set forth in Exhibit "B" attached hereto (the "Debentures"), and (b) its Warrants containing the terms and conditions and in the form of the Warrant set forth in Exhibit "C" attached hereto (the "Warrants and, together with the Debentures, the "Securities"). The Debentures are convertible into and the Warrants are exercisable for shares of the Company's Common Stock and the Debentures are secured by a first priority security interest in the collateral described in the Security Agreement. 2.2 Issuance and Sale of the Securities. At the Initial Closing, on the terms and subject to the conditions of this Agreement, the Company shall issue to the Purchaser (a) Debentures in the aggregate principal amount of $850,000.00, and (b) Warrants initially exercisable for an aggregate of 113,333 Warrant Shares (the number of Warrant Shares shall be determined by multiplying 40% times the quotient of (i) the aggregate principal amount of the Debentures divided by (ii) the Conversion Price (as defined in the Debentures) of the Debentures on their Issue Date (as defined in the Debentures)). For federal income tax purposes, the Company and the Purchaser agree that the aggregate amount paid by the Purchaser for (i) the Debentures is $850,000.00, and (ii) the Warrants is $0. Neither the Company nor the Purchaser shall file any Tax Return or take any position with any taxing authority inconsistent with the preceding sentence. 2.3 Additional Issuances and Sales of the Securities. Following the Initial Closing but not later than December 15, 1999, on the terms and subject to the conditions of this Agreement, the Company may, at its option, issue to the Purchaser and the Purchaser shall purchase from the Company additional Debentures and additional Warrants, exercisable for the purchase of the number of Warrant Shares calculated as provided in Section 2.2 above with respect to such additional Debentures, each such additional issuance being referred to herein as an "Additional Funding." Additional Fundings shall not occur more than once during any 15 day period. The Company shall deliver to the Purchaser a written request for each Additional Funding not less than 15 days prior to the Closing Date of each such Additional Funding, and such written request shall state (a) the aggregate principal amount of additional Debentures to be issued in such Additional Funding, which aggregate principal amount shall not be less than $500,000.00 for each Additional Funding, (b) the number of Warrant Shares for which the additional Warrants are exercisable, and (c) the Closing Date for such Additional Funding, each such Closing Date to be referred to herein as an "Additional Closing Date" and each Closing in connection therewith to be referred to herein as an "Additional Closing." The Securities issued at the Initial Closing together with Securities issued at all Additional Closings shall not exceed in the aggregate the following cumulative amounts, stated in terms of aggregate principal amounts of Debentures outstanding: 8 At October 15, 1999 $1,750,000.00 At November 15, 1999 $2,750,000.00 At December 15, 1999 and thereafter $4,000,000.00 Notwithstanding the foregoing, the Purchaser shall have no obligation to purchase any Securities in connection with any Additional Funding pursuant to Section 2.3, provided that the Purchaser may in its sole discretion purchase such Securities, (a) if the Company is in default or has breached any of its obligations under this Agreement or any of the Related Documents or if an Event of Default has occurred under the Debentures, (b) if the average of the closing bid prices for the Company's Common Stock for five (5) consecutive trading days, as quoted in the NASDAQ Stock Market System, is less than $1.50, or (c) if on October 15, 1999, the Company's Registration Statement on Form S-3, File No. 33-385753 has not been declared effective by the SEC or has not continued effective. On December 15, 1999, if the aggregate principal amount of the Debentures issued pursuant to this Section 2.3 and Section 2.2 above is less than $3,000,000.00, the Company shall pay to the Purchaser an amount equal to 2% of such difference. 2.4 Option to Acquire Additional Securities. Notwithstanding the foregoing, the Company hereby grants to the Purchaser the option, exercisable in whole or in part from time to time but not after February 28, 2000 at the Purchaser's sole discretion, to acquire Securities from the Company consisting of (a) Debentures in an aggregate principal amount of up to $1,750,000.00, and (b) Warrants exercisable for the purchase of the number of Warrant Shares calculated as provided in Section 2.2 above with respect to such Debentures. Article III - CLOSING; CLOSING DELIVERIES 3.1 Closing. The closing of the transactions contemplated by Section 2.2 of this Agreement (the "Initial Closing") shall take place at 10:00 a.m. on September 17, 1999, at the offices of Corbridge Baird & Christensen, Salt Lake City, Utah or at such other time, place and/or date as shall be agreed upon by the parties hereto. The date upon which the Initial Closing occurs is referred to herein as the "Initial Closing Date." The closing of the transactions contemplated by Sections 2.3 and 2.4 of this Agreement (the "Additional Closings") shall take place at such time, place and/or date as designated by the Company if pursuant to Section 2.3 or as designated by the Purchaser if pursuant to Section 2.4. The dates upon which the Additional Closings occur are referred to herein as the "Additional Closing Dates." 9 3.2 Payment for and Delivery of the Securities. At the Initial Closing, the Company shall issue and deliver to the Purchaser, (a) a Debenture in the aggregate principal amount of $850,000.00, against payment by the Purchaser, by wire transfer of immediately-available funds to the account designated by the Company not less than two (2) days prior to the Initial Closing Date, of $765,000.00 (net of 10% placement fee payable to Aspen Capital Resources, LLC pursuant to Section 12.4), and (b) duly issued Warrants initially exercisable for an aggregate of 113,333 Warrant Shares. At each Additional Closing, the Company shall issue and deliver to the Purchaser, (a) a Debenture in the aggregate principal amount specified pursuant to Section 2.3 or 2.4, against payment by the Purchaser, by wire transfer of immediately-available funds to the account designated by the Company not less than two (2) days prior to the Additional Closing Date, of the aggregate principal amount of the Debenture (net of a 10% placement fee payable to Aspen Capital Resources, LLC pursuant to Section 12.4), and (b) duly issued Warrants exercisable for the purchase of the number of Warrant Shares calculated as provided in Section 2.2 above with respect to such additional Debentures. Article IV - REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to Purchaser as follows: 4.1 Existence; Qualification; Subsidiaries. Each of the Company and its Subsidiaries is a corporation, partnership or limited liability company, as the case may be, duly organized, validly existing and in good standing under the laws of the state of its incorporation or formation and has full corporate or partnership power and authority, as the case may be, to conduct its business and own and operate its properties as now conducted, owned and operated. The copies of the Certificate of Incorporation, as amended, and By-Laws of the Company and all amendments thereto previously delivered to the Purchaser are true, correct and complete copies of such documents. The Company and each Subsidiary is licensed or qualified as a foreign corporation, partnership or limited liability company and is in good standing in all jurisdictions where such person is required to be so licensed or qualified, except where the failure to be so licensed, qualified or in good standing would not have a Material Adverse Effect. Except as set forth on Schedule 4.1, the Company has no Subsidiaries and owns no Capital Stock or other securities of, and has not made any other investment in, any other entity. All of the issued shares of Capital Stock, partnership interests or membership interests, as the case may be, of each Subsidiary have been duly and validly authorized and issued, are fully paid and non-assessable and are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or adverse claims. 4.2 Authorization and Enforceability; Issuance of the Securities, the Conversion Shares and the Warrant Shares. 10 (a) The Company has full power and authority and has taken all required corporate and other action necessary to permit it to execute and deliver this Agreement and the Related Documents and to carry out the terms hereof and thereof and to issue and deliver the Securities, the Conversion Shares and the Warrant Shares, and none of such actions will violate any provision of the Certificate of Incorporation of the Company, the By-Laws of the Company or of any applicable law, regulation, order, judgment or decree or rule of any stock exchange where the Company's Common Stock is listed or market in which the Company's Common Stock is quoted, or result in the breach of or constitute a default (or an event which, with notice or lapse of time or both would constitute a default) under any material agreement (including the Company's current secured debt instruments set forth on Schedule 4.2 (the "Existing Indebtedness")), instrument or understanding to which the Company is a party or by which it is bound or by which it will become bound as a result of the transactions contemplated by this Agreement. This Agreement, each of the Related Documents and all other agreements and instruments contemplated hereby to which the Company is a party, have been duly executed and delivered by the Company and each constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except to the extent that enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium and similar laws of general application related to the enforcement of creditor's rights generally and (ii) general principles of equity. (b) The execution, delivery and performance of this Agreement, each of the Related Documents and all other agreements and instruments contemplated hereby to which the Company is a party have been duly authorized by the Company. The Conversion Shares and the Warrant Shares, will be fully paid and nonassessable. The Conversion Shares and the Warrant Shares have been duly reserved for issuance upon conversion of the Debentures and exercise of the Warrants, as the case may be, and, when so issued, will be duly authorized, validly issued and outstanding, fully paid and nonassessable shares of Common Stock. Neither the issuance and delivery of any Conversion Shares upon conversion of any Debentures nor the issuance and delivery of any Warrant Shares upon exercise of the Warrants is subject to any preemptive right of any stockholder of the Company or to any right of first refusal or other similar right in favor of any Person. 11 4.3 Capitalization. The authorized Capital Stock of the Company consists of (a) 25,000,000 shares of Common Stock, par value $.001 per share, of which, as of September 3, 1999, 12,744,009 shares were outstanding, 439,699 shares are reserved for issuance upon conversion of the Debentures, 175,880 shares are reserved for issuance upon exercise of the Warrants, and 6,250,756 shares are reserved for issuance upon the exercise of certain stock options and warrants, and (b) 10,000,000 shares of preferred stock, par value $.001 per share, of which (i) 3,000 shares have been designated Series A Preferred Stock, of which 3,000 shares are issued and outstanding, (ii) 312,882 shares have been designated Series B Preferred Stock, of which 14,310 shares are issued and outstanding, (iii) 1,500 shares have been designated Series C Preferred Stock, of which 200 shares are issued and outstanding, (iv) 80,000 shares have been designated Series D Preferred Stock, of which 60,000 shares are issued and outstanding; and (v) 3,000,000 are reserved for issuance upon conversion of certain convertible secured debt. All of the outstanding Capital Stock has been validly issued and is fully paid and nonassessable and has been issued in compliance with all applicable securities laws (including the provisions of the Securities Act and the rules and regulations promulgated thereunder). Except as set forth in Schedule 4.3, there are no options, convertible securities, warrants, calls, pledges, transfer restrictions (except restrictions imposed by federal and state securities laws), voting restrictions, liens, rights of first offer, rights of first refusal, antidilution provisions or commitments of any character relating to any issued or unissued shares of Capital Stock of the Company other than as contemplated in the Related Documents. Except as contemplated by this Agreement and the Related Documents or as set forth in Schedule 4.3, there are no preferential rights applicable to the issuance and sale of the Securities, the Conversion Shares and the Warrant Shares. 4.4 Private Sale. Assuming the accuracy of the representations and warranties made by recipients of the Company's Capital Stock in connection with the acquisition of such Capital Stock, the Company has not violated any applicable federal or state securities laws in connection with the offer, sale and issuance of any of its Capital Stock. Subject to the accuracy of the Purchaser's representations contained herein, neither the offer, sale and issuance of the Securities hereunder nor the issuance and delivery of any Conversion Shares upon conversion of any Debentures or any Warrant Shares upon exercise of any Warrants requires registration under the Securities Act or any state securities laws. 4.5 Financial Statements; Disclosure. (a) The Financial Statements (together with the notes thereto, as applicable), subject to modifications required by the current SEC review of the Company's Registration Statement on Form S-3, (i) are true, correct and complete in all material respects, (ii) are in accordance with the books and records of the Company and (iii) fairly present the financial condition and results of operations of the Company as of the dates and for the periods indicated in accordance with GAAP, except that the unaudited balance sheets and related financial statements do not contain an auditors' opinion and do not contain footnotes and are subject to normal, recurring year-end audit adjustments which are not material. (b) This Agreement together with the schedules, attachments, exhibits, written statements and certificates supplied to the Purchaser by or on behalf of the Company with respect to the transactions contemplated hereby does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained herein or therein, in light of the circumstances in which they were made, not misleading. There is no fact which has not been disclosed to the Purchaser of which the Company has knowledge, and which has had or could reasonably be anticipated to have a Material Adverse Effect. 12 (c) As of its filing date, each document filed with the SEC by the Company, as amended or supplemented prior to the Initial Closing Date or any Additional Closing Date, if applicable, pursuant to the Securities Act and/or the Exchange Act, true and correct copies of which have been given to the Purchaser, subject to modifications required by the current SEC review of the Company's Registration Statement on Form S-3, (i) complied in all material respects with the applicable requirements of the Securities Act and/or Exchange Act and (ii) did not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. Each final registration statement filed with the SEC by the Company pursuant to the Securities Act, as of the date such statement became effective (i) complied in all material respects with the applicable requirements of the Securities Act and (ii) did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading (in the case of any prospectus, in light of the circumstances under which they were made). 4.6 Absence of Certain Changes. (a) Except as set forth on Schedule 4.6(a) since the date of the Current Balance Sheet, neither the Company nor any Subsidiary has: (i) incurred any Liabilities other than current Liabilities incurred, or obligations under contracts entered into, in the ordinary course of business and for individual amounts not greater than $250,000; (ii) paid, discharged or satisfied any claim, Lien or Liability, other than any claim, Lien or Liability (A) reflected or reserved against on the Current Balance Sheet and paid, discharged or satisfied in the ordinary course of business since the date of the Current Balance Sheet or (B) incurred and paid, discharged or satisfied since the date of the Current Balance Sheet, in each case in the ordinary course of business; (iii) sold, leased, assigned or otherwise transferred any of its assets, tangible or intangible (other than sales of inventory in the ordinary course of business and use of supplies in the ordinary course of business); (iv) permitted any of its assets, tangible or intangible, to become subject to any Lien (other than any Permitted Lien); (v) written off as uncollectible any accounts receivable other than (A) in the ordinary course of business or (B) for amounts not greater than $50,000 in the aggregate; (vi) terminated or amended or suffered the termination or amendment of, or other than in the ordinary course of business, failed to perform in all material respects all of its obligations or suffered or permitted any material default to exist under, any material agreement, license or permit (except the agreement as disclosed between the Company and EARTHCO relating to a preparation plant and fines ponds lease in Wellington, Utah); (vii) suffered any damage, destruction or loss of tangible property (whether or not covered by insurance) which in the aggregate exceeds $100,000; (viii) made any loan (other than intercompany advances) to any other Person (other than advances to employees in the ordinary course of business which do not exceed $10,000 individually or $50,000 in the aggregate); 13 (ix) canceled, waived or released any debt, claim or right in an amount or having a value exceeding $100,000; (x) paid any amount to or entered into any agreement, arrangement or transaction with, or any series of agreements, arrangements or transactions with, any Affiliate (including its officers, directors and employees) having a value of in excess of $50,000 in the aggregate (other than as Company-wide employee benefits or termination benefits paid in the ordinary course of business); (xi) declared, set aside, or paid any dividend or distribution with respect to its Capital Stock or redeemed, purchased or otherwise acquired any of its Capital Stock; (xii) other than in the ordinary course of business or under existing contractual terms or obligations, granted any increase in the compensation of any officer or employee or made any other change in employment terms of any officer or employee (except the arrangements as disclosed between the Company and Messrs. Kimball, Fraley, Thompson, Madden and Cook); (xiii) made any change in any method of accounting or accounting practice; (xiv) suffered or caused any other occurrence, event or transaction outside the ordinary course of business or which could have a Material Adverse Effect; or (xv) agreed, in writing or otherwise, to any of the foregoing. (b) Since the date of the Current Balance Sheet, there has been no Material Adverse Change. (c) Schedule 4.6(c) hereto sets forth a complete and accurate list as of the date hereof of (i) each place of business of the Company and each of its Subsidiaries and (ii) the chief executive office of the Company and each of its Subsidiaries. 4.7 Litigation. Except as set forth in Schedule 4.7, no claim, suit, proceeding or investigation is proceeding, pending or, to the knowledge of the Company, threatened against or affecting the Company, any Subsidiary or any licensee or any officer or director thereof or the Company's, the Subsidiaries' or the licensee's business which if decided adversely to any such person could have a Material Adverse Effect. 14 4.8 Licenses, Compliance with Law, Other Agreements, Etc. Each of the Company and its Subsidiaries has all material franchises, permits, licenses and other rights to allow it to conduct its business and is not in violation, in any material respects of any order or decree of any court, or of any law, order or regulation of any Governmental Agency, or of the provisions of any contract or agreement to which it is a party or by which it is bound (except the agreement as disclosed between the Company and EARTHCO and the financing arrangement as disclosed for the Mountaineer Facility), and neither this Agreement nor the Related Documents nor the transactions contemplated hereby or thereby will result in any such violation. Each of the Company's and its Subsidiary's business has been conducted in compliance with all federal, state and local laws, ordinances, rules and regulations, in all material respects. To the knowledge of the Company, conditions or events of non-compliance with respect to the Company's licensees that would have a Material Adverse Effect on the Company or its contractual relationships with its licensees. 4.9 Third-Party Approvals. Assuming the accuracy of the representations and warranties of the Purchaser contained in this Agreement, the Company is not required to obtain any order, consent, approval or authorization of, or to make any declaration or filing with, any Governmental Agency or other third party (including under any state securities or "blue sky" laws) in connection with the execution and delivery of this Agreement or the Related Documents, or the consummation of the transactions contemplated hereby or thereby to occur on the Initial Closing Date or any Additional Closing Date, except for the consent and approval of OZ Master Fund, Ltd. 4.10 No Undisclosed Liabilities. Neither the Company nor any of its Subsidiaries has any material Liabilities except (i) as and to the extent of the amounts reflected or reserved against on the Current Balance Sheet and (ii) liabilities and obligations incurred in the ordinary course of business since the date thereof that in the aggregate could not result in a Material Adverse Effect. 4.11 Tangible Assets. Each of the Company and its Subsidiaries has good and marketable title to, or valid leasehold interests in, all material tangible assets used or reasonably necessary in connection with the conduct of its business. 4.12 Inventory. All inventory of each of the Company and its Subsidiaries, whether reflected on the Current Balance Sheet or otherwise, consists of a quality and quantity usable or salable in the ordinary course of business, subject to defect or obsolescence consistent with the Company's historical experience. 4.13 Owned Real Property. Set forth on Schedule 4.13 is a true and correct description of all real property owned by the Company and its Subsidiaries. The Company and each of its Subsidiaries has good and marketable title in fee simple, free and clear of all Liens (other than any Permitted Lien), to all of the real property owned by the Company and each of its Subsidiaries. 15 4.14 Real Property Leases. There exists no event of default (nor any event which with notice or lapse of time would constitute an event of default) with respect to the Company, any Subsidiary and, to the Company's knowledge, with respect to any other party thereto under any agreement pursuant to which the Company is the lessee or lessor of any real property, except for such defaults and defects in enforceability as could not in the aggregate be expected to have a Material Adverse Effect, and all such agreements are in full force and effect and enforceable against the lessor or lessee in accordance with their terms except for such defaults and defects in enforceability as could not in the aggregate be expected to have a Material Adverse Effect (except the agreement as disclosed between the Company and EARTHCO relating to a preparation plant and fines ponds lease in Wellington, Utah). 4.15 Agreements. None of the Company, any Subsidiary or, to the knowledge of the Company, any licensee is in default, nor to the knowledge of the Company is there any basis for a valid claim of default, and to the Company's knowledge no event has occurred which, with notice or lapse of time, would constitute a default, under any agreement, arrangement or understanding to which the Company, any Subsidiary or any licensee is a party, and to the knowledge of the Company, no Person other than the Company is in default under any such agreement, in each case other than defaults which in the aggregate could not be expected to have a Material Adverse Effect (except the agreement as disclosed between the Company and EARTHCO relating to a preparation plant and fines ponds lease in Wellington, Utah). Additionally, none of the Company, any Subsidiary or, to the knowledge of the Company, any licensee is party to any agreement the performance of which in accordance with its terms (including any termination provision thereof) could be expected to have a Material Adverse Effect. 16 4.16 Intellectual Property. Schedule 4.16 sets forth a complete list of (i) all patented, registered, applied for or otherwise material Intellectual Property owned, filed or used by the Company; and (ii) all trade names and material unregistered trademarks and other designations used by the Company in connection with its business. The Company owns and possesses all right, title and interest in and to, or has a valid and enforceable license to use, all Intellectual Property used by the Company in its business as currently conducted and as currently proposed to be conducted. No claim by any third party contesting the validity, enforceability, use or ownership of Intellectual Property owned, held or used by the Company has been made or, to the knowledge of the Company, is threatened. To the knowledge of the Company, neither it nor its indemnitees has violated or misappropriated the Intellectual Property of any third party and no third party has violated or misappropriated Intellectual Property owned, held or used by the Company. No claim by any third party has been asserted, or to the knowledge of the Company threatened, that the Company or its indemnitees is violating or misappropriating Intellectual Property. To the knowledge of the Company, all Intellectual Property owned or held by the Company is valid, subsisting and enforceable, and all such Intellectual Property is free of all Liens, and, except as set forth on Schedule 4.16, is fully assignable by the Company to any Person, without payment, consent of any Person or other condition or restriction. The Company has taken all reasonable measures to protect the secrecy, confidentiality and value of all Confidential Information, proprietary information and trade secrets owned, held or used by the Company (including, without limitation, entering into appropriate confidentiality agreements with all officers, directors, employees, and other Persons with access to such information and trade secrets). To the knowledge of the Company, such information and trade secrets have not been disclosed to any Persons other than Company employees or Company contractors who had a need to know and use such information and trade secrets in the ordinary course of employment or contract performance and who executed appropriate confidentiality agreements. 4.17 Employees. The Company is not a party to or bound by any collective bargaining agreement, nor has it experienced any strike, material grievance, material claim of unfair labor practice or other collective bargaining dispute. To the knowledge of the Company there is no organizational effort being made or threatened by or on behalf of any labor union with respect to its employees. To the knowledge of the Company, it has not committed any unfair labor practice or violated any federal, state or local law or regulation regulating employers or the terms and conditions of its employees' employment, including laws regulating employee wages and hours, employment discrimination, employee civil rights, equal employment opportunity and employment of foreign nationals, except for such violations as could not be expected to have a Material Adverse Effect. 4.18 ERISA; Employee Benefits. The Company has no Plans and agrees that it will not adopt any Plan, other than a defined contribution 401(k) plan while any of the Debentures are outstanding. 4.19 Environmental Laws. Except as set forth on Schedule 4.19: (a) Each of the Company (as used in this Section 4.19, Company shall include any predecessor and the Company's Subsidiaries) and, to the knowledge of the Company, its licensees has complied and is in compliance with all Environmental Laws. (b) The Company and, to the knowledge of the Company, its licensees have obtained and complied with, and are in compliance with, all permits, licenses and other authorizations that are required pursuant to Environmental Laws to operate its facilities, assets, and its businesses. (c) No Environmental Actions have been asserted against the Company or, to the knowledge of the Company, against any licensee or facility that may have received Hazardous Materials generated by the Company or any licensee, regarding any actual, threatened, or alleged violation of Environmental Laws, or any liabilities or potential liabilities (whether accrued, absolute, contingent, unliquidated, or otherwise), including any investigatory, remedial, or corrective obligations, relating to it or its operations under Environmental Laws. 17 (d) To the knowledge of the Company, none of the following exists at any property or facility currently or formerly owned or operated by either the Company or, to the knowledge of the Company, any licensee: (i) underground storage tanks, (ii) asbestos-containing material in any form or condition, (iii) materials or equipment containing polychlorinated biphenyls, or (iv) landfills, surface impoundments, or waste disposal areas, except for feed-stock properties for Company facilities. (e) Except as disclosed on Schedule 4.19, neither the Company nor, to the knowledge of the Company, any licensee has treated, stored, disposed of, arranged for or permitted the disposal of, transported, handled, or Released any substance, including without limitation any Hazardous Material, or owned or operated any property or facility (and no such property or facility is contaminated by any such substance) in a manner that has given or would give rise to Environmental Liabilities and Costs. There has been no Release at any of the properties owned or operated by the Company or, to the knowledge of the Company, at any of the properties owned or operated by its licensees or, to the knowledge of the Company, at any disposal treatment facility which received Hazardous Materials generated by the Company or any licensee which is reasonably likely to result in Environmental Liabilities and Costs. (f) Except as disclosed on Schedule 4.19, neither this Agreement nor the consummation of the transactions that are contemplated by this Agreement will result in any obligations for site investigation, cleanup or notification pursuant to any so-called "transaction-triggered" or "responsible property transfer" Environmental Laws. (g) Neither the Company nor, to the knowledge of the Company, any licensee has, either expressly or by operation of law, assumed or undertaken any liability, including without limitation any obligation for corrective or Remedial Action, of any other Person relating to Environmental Laws. 4.20 Transactions With Affiliates. Except as set forth on Schedule 4.20, neither the Company nor any Subsidiary is party to any agreement, arrangement or transaction or series of agreements, arrangements or transactions with any Affiliate which agreements, arrangements, transactions and series of transactions in the aggregate have a value over $50,000 (other than as Company-wide employee benefits paid in the ordinary course of business). 4.21 Taxes. (a) Except as disclosed on Schedule 4.21, each of the Company and its Subsidiaries has filed all Tax Returns that it was required to file, and has paid all Taxes due with respect to the periods covered by such Tax Returns. 18 (b)None of the Company and its Subsidiaries (i) has been a member of an affiliated group filing a consolidated federal Tax Return (other than a group the common parent of which was the Company) or (ii) has any Liability for the Taxes of any Person (other than any of the Company and its Subsidiaries) under Treas. Reg. ss.1.1502-6 (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract, or otherwise. (c) Each of the Company and its Subsidiaries has withheld and paid all taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other third party. (d) Except as set forth on Schedule 4.21, there is no dispute or claim concerning any Tax Liability of any of the Company and its Subsidiaries either (i) claimed or raised by any authority in writing or (ii) as to which any of the directors and officers (and employees responsible for Tax matters) of the Company and its Subsidiaries has knowledge based upon personal contact with any agent of such authority. 4.22 Other Investors. Set forth on Schedule 4.22 is a list of all shareholders (including option and convertible security holders) of the Company who as of the date hereof, based on SEC filings of such shareholders, after giving effect to the terms hereof, own more than 5% of the fully diluted common equity of the Company and sets forth such percentage ownership. 4.23 Year 2000 Representations. The Company represents and warrants that: (a) The Company does not have any computer applications that it believes are mission critical to the operation of synthetic fuel facilities that it operates. While the Company has not formally verified Year 2000 compliance with licensees that utilize the Company's technology in their synthetic fuel facilities, the Company believes that the computer applications used in the operations of these facilities are not mission critical. Accordingly, the Company believes that Year 2000 issues will not be significant to these computer applications and therefore, upgrading or modifications to these applications to make them Year 2000 compliant will not be significant. (b) During 1998 the Company upgraded its network operating system and believes that system is Year 2000 compliant and that any additional upgrading to that system will not be significant. The Company utilizes computer applications in the finance and accounting departments and in the corporate office that need to be upgraded in order to be Year 2000 compliant. The Company expects to complete the upgrade of its corporate computer applications for Year 2000 compliance by September 30, 1999. 4.24 Investment Company. The Company is not, and is not controlled by or under common control with an affiliate of, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 19 4.25 Certain Fees. Other than fees and expenses due and payable to the Purchaser pursuant to Section 12.4, no fees or commissions will be payable by the Company to any broker, financial advisor, finder, investment banker, or bank with respect to the transactions contemplated by this Agreement. The Purchaser shall not have any obligation with respect to any fees or with respect to any claims made by or on behalf of any Persons for fees of a type contemplated in this section that may be due in connection with the transactions contemplated by this Agreement. The Company shall indemnify and hold harmless the Purchaser, its employees, officers, directors, agents and partners, and their respective Affiliates from and against all claims, losses, damages, costs (including attorney's fees) and expenses suffered in respect to any such claimed or existing fees. 4.26 Solicitation Materials. The Company has not (i) distributed any offering materials to the Purchaser in connection with the offering and sale of the Securities other than its public filings with the SEC, or (ii) solicited any offer to buy or sell the Securities by means of any form of general solicitation or general advertising within the meaning of Regulation D under the Securities Act. None of the information provided to the Purchaser by or on behalf of the Company contain any untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. 4.27 Form S-3 Filing. The Company has filed a registration statement with the SEC on Form S-3 promulgated under the Securities Act, File No. 33-385753, to register the resale of the Conversion Shares, the Warrant Shares and shares otherwise issuable pursuant to this Agreement. 4.28 Listing and Maintenance Requirements Compliance. (a) The Company has not received notice (written or oral) from the National Association of Securities Dealers that the Company is not in compliance with its listing or maintenance requirements. (b) Upon conversion of the Debentures into Conversion Shares or the exercise of the Warrants for the Warrant Shares, all such Conversion Shares and Warrant Shares shall be listed on the NASDAQ National Market System. 20 4.29 Registration Rights; Rights of Participation. Except as described on Schedule 4.29 hereto, (a) the Company has not granted or agreed to grant to any Person any rights (including "piggy-back" registration rights) to have any securities of the Company registered with the SEC or any other Governmental Agency which has not expired or been satisfied in full and (b) no Person, including, but not limited to, current or former shareholders of the Company, underwriters, brokers or agents, has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by this Agreement or any other related document which has not been waived. None of the rights granted to the Purchaser hereunder and under the Related Documents conflicts with or would cause a default under any of the agreements or arrangements listed on Schedule 4.29 hereto. 4.30 Synthetic Fuel Facilities. (a) The Company shall take all reasonably necessary action to ensure that the credit for producing fuel from a nonconventional source provided under Section 29 of the Code is available and is maintained with respect to each of the Company's and its licensee's facilities for producing synthetic fuels ("Facilities") including, without limitation, ensuring that the Facilities produce "qualified fuels" (as defined in Section 29(c) of the Code) and such qualified fuels are sold to persons that are not "related persons" (as defined in Section 29(d)(7) of the Code). Each of the Facilities was placed in service before July 1, 1998, in each case pursuant to a binding written contract in effect on or before December 31, 1996. For purposes of this Section 4.30, each representation made by the Company is made to the knowledge of the Company. (b) Each of the representations and warranties made by any of the Company, its Subsidiaries or its licensees in obtaining any private letter ruling from the Internal Revenue Service was true and correct in all material respects when made and as of the date the ruling was issued. (c) Set forth on Schedule 4.30 is each private letter ruling obtained from the Internal Revenue Service regarding the Facilities which is addressed to the Company or any of its licensees or is otherwise able to be relied upon by the Company. To the Company's knowledge, (i) no private letter ruling listed on Schedule 4.30 has been amended, rescinded or revoked since the date of issuance, and (ii) there exists no reason that the Internal Revenue Service would deny a request by the Company or any owner of the Facilities for a private letter ruling with regard to the Facilities owned by the Company or any of its licensees. Article V - REPRESENTATIONS AND WARRANTIES OF THE PURCHASER The Purchaser hereby represents and warrants to the Company as follows: 5.1 Authorization and Enforceability. The Purchaser has full power and authority and has taken all action necessary to permit it to execute and deliver this Agreement and the other documents and instruments to be executed by it pursuant hereto and to carry out the terms hereof and thereof. This Agreement and each such other document and instrument, when duly executed and delivered by the Purchaser, will constitute a valid and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms, except to the extent limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium and similar laws of general application related to the enforcement of creditors' rights generally and (ii) general principles of equity. 21 5.2 Purchaser's Ability to Perform. As of the Initial Closing, the Purchaser has the financial resources to perform fully its total obligations under this Agreement. 5.3 Restrictions on Sale. The Purchaser agrees that it will not sell (sell means making any long or short sales, purchasing put options, selling call options, or selling any derivative security (i.e. swap agreements) in the Company's Common Stock or related to the Company's Common Stock) any shares of the Common Stock of the Company before the earlier of (i) the date which is 30 days after the effective date of the Registration Statement on Form S-3 filed with the SEC on May 26, 1999, SEC File No. 333-79385, registering the sale of shares of the Company's Common Stock by the OZ Master Fund, Ltd. (the "OZ Master Fund Registration"), or (ii) the withdrawal of the OZ Master Fund Registration. The Company acknowledges and agrees that it will file an amendment to the Registration Statement on Form S-3, filed with the SEC on November 16, 1998, SEC File No. 333-67371 (the "Johnson Registration"), amending the Registration Statement to conform with comments received from the SEC, on or before September 24, 1999 and if the amendment is not filed on or before such date the Company hereby covenants and agrees to issue or cause to be issued to the Purchaser on such date additional shares of Common Stock equal in number to (i) 10% of the aggregate principal amount of Debentures issued pursuant to this Agreement, divided by (ii) the Conversion Price (as defined in the Debentures) on such date. If the OZ Master Fund Registration has not been declared effective on or before October 7, 1999 the Company hereby covenants and agrees to issue or cause to be issued to the Purchaser on such date and on every date which is 30 days or a multiple thereof after such date, until such registration shall become effective, additional shares of Common Stock equal in number to (i) 10% of the aggregate principal amount of Debentures issued pursuant to this Agreement, divided by (ii) the Conversion Price (as defined in the Debentures) on such date. On the earlier of November 6, 1999 or 30 days after the effective date of the OZ Master Fund Registration, if the Company and OZ Master Fund, Ltd. ("OZ") waive the provisions of Section 5.3 of the Purchase Agreement and the Aspen Registration, SEC File No. 333-85753, has been declared effective by the SEC, the Purchaser agrees to waive all penalties accruing to it pursuant to Section 5.3 of the Purchase Agreement. The Company and the Purchaser acknowledge and agree that (a) OZ is intended to be, and is, a third-party beneficiary to Section 5.3 of the Purchase Agreement, (b) OZ shall have the right to commence and prosecute any judicial or other action seeking to enforce the requirements of, or seeking damages for any violation of, Section 5.3 of the Purchase Agreement whether or not the Company joins in such action seeking to enforce the requirements of, or seeking damages for any violation of, Section 5.3 of the Purchase Agreement and (c) no waiver of the obligations of the Purchaser under Section 5.3 of the Purchase Agreement shall in any event be effective unless OZ joins in writing in, or consents in writing to, such waiver. Article VI - COMPLIANCE WITH SECURITIES LAWS 6.1 Investment Intent of the Purchaser. The Purchaser represents and warrants to the Company that it is acquiring the Securities for its own account, with no present intention of selling or otherwise distributing the same in violation of the Securities Act. 22 6.2 Status of Securities. The Purchaser has been informed by the Company that the Securities have not been registered under the Securities Act or under any state securities laws and are being offered and sold in reliance upon federal and state exemptions for transactions not involving any public offering. 6.3 Accredited Investor Status. The Purchaser represents and warrants to the Company that it is an "Accredited Investor" as defined in Regulation D under the Securities Act. 6.4 Access to Information. The Purchaser has had access to management of the Company and has been able to ask questions of management related to the Company and has reviewed the Company's filings pursuant to the Exchange Act. Notwithstanding any due diligence investigations conducted by or on behalf of the Purchaser, it is understood and agreed by each of the parties hereto that the Purchaser is entitled to rely, and is relying, on the representations and warranties made by the Company herein and in the Related Documents. 6.5 Transfer of Securities, Conversion Shares and Warrant Shares. (a) Securities, Conversion Shares and Warrant Shares may be transferred (i) pursuant to public offerings registered under the Securities Act, (ii) pursuant to Rule 144 of the SEC (or any similar rule then in force), (iii) to an Affiliate or member of the Family Group of the transferor (provided that the subsequent transfer of the Securities, Conversion Shares or Warrant Shares is restricted), or (iv) subject to the conditions set forth in Section 6.5(b), any other legally available means of transfer. (b) In connection with any transfer of any Securities, Conversion Shares or Warrant Shares (other than a transfer described in Section 6.5(a)(i), (ii) or (iii)), the holder of such shares shall deliver written notice to the Company describing in reasonable detail the proposed transfer, together with an opinion of counsel (which, to the Company's reasonable satisfaction, is knowledgeable in securities law matters), to the effect that such transfer may be effected without registration of such shares under the Securities Act. (c) Until transferred pursuant to clauses (a)(i) or (ii) above or pursuant to clause (a)(i) above with an opinion of counsel pursuant to paragraph (b) above that such legend is not required, each Debenture, Warrant, Conversion Shares and Warrant Shares shall be imprinted with a legend substantially in the following form: 23 THE SECURITIES REPRESENTED BY THIS [DEBENTURE/CERTIFICATE/ WARRANT] WERE ORIGINALLY ISSUED ON ________, 1999 AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAW. THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS [DEBENTURE/CERTIFICATE/WARRANT] IS SUBJECT TO THE CONDITIONS SET FORTH IN THE SECURITIES PURCHASE AGREEMENT, DATED AS OF SEPTEMBER 17, 1999, BETWEEN THE ISSUER (THE "COMPANY") AND THE PURCHASER NAMED THEREIN. THE COMPANY RESERVES THE RIGHT TO REFUSE ANY TRANSFER OF SUCH SECURITIES UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED WITH RESPECT TO SUCH TRANSFER. A COPY OF SUCH CONDITIONS SHALL BE FURNISHED WITHOUT CHARGE TO THE HOLDER HEREOF UPON WRITTEN REQUEST TO THE COMPANY. Article VII - CONDITIONS PRECEDENT 7.1 Conditions Precedent. The obligation of the Purchaser to purchase any Securities hereunder is subject to the satisfaction of each of the following conditions precedent: (a) The issuance and sale of the Securities shall not contravene any law, rule or regulation applicable to the Purchaser or the Company or any of its Subsidiaries; (b) The following conditions have been satisfied as of the Initial Closing Date and each Additional Closing Date, (i) The representations and warranties of the Company contained herein and in any Related Document and in any writing delivered pursuant hereto or thereto shall be true and correct when made and materially true and correct as of the time of the Initial Closing and each Additional Closing; (ii) No action, suit, investigation or proceeding shall be pending or threatened before any court or Governmental Agency to restrain, prohibit, collect damages as a result of or otherwise challenge this Agreement or any Related Document or any transaction contemplated hereby or thereby; (iii) All acts or covenants required hereunder to be performed by the Company prior to the Initial Closing and each Additional Closing shall have been fully performed by it; and (iv) No Material Adverse Change shall have occurred between the date of the Current Balance Sheet and the Initial Closing Date or Additional Closing Date and no event or occurrence shall have occurred that could have a Material Adverse Effect. (c) The following documents and items shall be delivered to the Purchaser at or prior to the Initial Closing and each Additional Closing: 24 (i) A fully executed counterpart of this Agreement (at the Initial Closing only), and fully executed Debentures, the Security Agreement and the UCC-1 financing statements related thereto, the Warrants and the certificates (in such denominations as the Purchaser shall request) for the Warrants being delivered by the Company at the Initial Closing and each Additional Closing. (ii) Certificates of a duly authorized officer of the Company dated as of the Initial Closing Date and each Additional Closing Date: (A) Stating that the following conditions have been satisfied as of the Initial Closing Date and each Additional Closing Date: (1) The representations and warranties of the Company contained herein and in any writing delivered pursuant hereto were true and correct when made and are materially true and correct as of the time of the Initial Closing and each Additional Closing; (2) No action, suit, investigation or proceeding is pending or threatened before any court or Governmental Agency to restrain, prohibit, collect damages as a result of or otherwise challenge this Agreement or any Related Document or any transaction contemplated hereby or thereby; (3) All acts or covenants required hereunder to be performed by the Company prior to the Initial Closing and each Additional Closing have been fully performed by it; and (4) No Material Adverse Change shall have occurred between the date of the Current Balance Sheet and the Initial Closing Date and each Additional Closing Date and there shall have been no event or occurrence that could result in a Material Adverse Effect; and (B) Setting forth the resolutions of the Board of Directors authorizing the execution and delivery of this Agreement and the Related Documents and the consummation of the transactions contemplated hereby and thereby, and certifying that such resolutions were duly adopted and have not been rescinded or amended; (iii) The Company shall have paid fees payable pursuant to Section 12.4 hereof; (iv) A copy of a certificate of the appropriate official(s) of the state of organization and each state of foreign qualification of the Company and each of its Subsidiaries certifying as of the date of the certificate to the existence in good standing of, and the payment of taxes by, such Person in such states; 25 (v) A true and complete copy of the Certificate of Incorporation, as amended, of the Company, certified as of a date not more than six months prior to the Initial Closing Date by an appropriate official of the state of organization of each such Person, a true and complete copy of the Bylaws of the Company, certified as of the Initial Closing Date by the Secretary of the Company, and a certificate as of each Additional Closing Date by the Secretary of the Company that there has been no change to the Certificate of Incorporation or Bylaws of the Company since the Initial Closing Date; and (vi) Such other documents relating to the transactions contemplated hereby as the Purchaser may reasonably request. 7.2 Closing Deliveries to the Company. The Purchaser will deliver to the Company the aggregate purchase price for the Securities to be acquired by the Purchaser, net of a 10% placement fee payable to Aspen Capital Resources, LLC. Article VIII - COVENANTS OF THE COMPANY 8.1 Restricted Actions. Without the prior written consent of the Purchaser, and for so long as any of the Debentures remain outstanding, the Company shall not, and shall not permit any Subsidiary to: (a) become subject to any agreement or instrument which by its terms would (under any circumstances) restrict or impair the Company's right to comply with or fulfill its obligations under the terms of this Agreement or any of the Related Documents; (b) use the proceeds from the sale of the Securities other than for repayment of indebtedness, working capital and other general corporate purposes; provided, that the Company will in no event use the proceeds to invest in any securities other than short-term, interest-bearing government securities; (c) enter into any transaction or series of transactions with any stockholder, director, officer, employee or Affiliate, including, without limitation, the purchase, sale, lease or exchange of any property, the rendering of any service or any investment, loan or advance, unless such transaction (i) is consummated by the Company in good faith on an arm's-length basis, (ii) is less than $100,000 per occurrence or $250,000 in the aggregate, and (iii) is approved by the Board of Directors, including by a majority of the Company's disinterested directors; 26 (d) declare or pay any dividends, purchase or otherwise acquire for value any of its membership interests or other Capital Stock now or hereafter outstanding, return any capital to its members as such, or make any other payment or distribution of assets to its stockholders as such, or permit any of its Subsidiaries to do any of the foregoing or to purchase or otherwise acquire for value any Capital Stock of the Company or its Subsidiaries, or make any payment or prepayment of principal of, premium, if any, or interest on, or redeem, decrease or otherwise retire, any Indebtedness before its scheduled due date; (e) materially alter or change the business of the Company; (f) issue any stock option or warrant at less than the Fair Market Value at the time of grant; (g) unless the Company has issued and sold $4,000,000.00 of the Debentures to the Purchaser, create, incur or suffer to exist any Indebtedness, other than: (i) Indebtedness created hereunder and under the Debentures; and (ii) Indebtedness existing on the date hereof, and any extension of maturity, refinancing or modification of the terms there of provided, however, that such extension, refinancing or modification (A) is pursuant to terms that are not materially less favorable to the purchaser than the terms of the Indebtedness being extended, refinanced or modified and (B) after giving effect to the extension, refinancing or modification, such Indebtedness is not greater than the amount of Indebtedness outstanding immediately prior to such extension, refinancing or modification. (h) alter the rights, preferences and privileges of the Securities, the Conversion Shares or the Warrant Shares; (i) allow the use, handling, generation, storage, treatment, release or disposal of Hazardous Materials at any property owned or leased by the Company or any of its Subsidiaries except in compliance with Environmental Laws and so long as such use, handling, generation, storage, treatment, release or disposal of Hazardous Materials does not result in a violation of Environmental Law which would result in a Material Adverse Change; and (j) grant any rights of registration under the Securities Act relating to any of its shares of Capital Stock or other securities to any Person other than pursuant to this Agreement, unless (i) the rights so granted to another Person do not limit, restrict or impair the rights of the Purchaser under this Agreement and under the Related Documents and (ii) such rights so granted to another Person do not grant priority in registration rights to such other Person over rights granted to Purchaser under this Agreement and under the Related Documents. 8.2 Required Actions. For so long as any of the Debentures remain outstanding, the Company shall, and shall cause each Subsidiary to: 27 (a) cause all properties owned by the Company or any of its Subsidiaries or used or held for use in the conduct of its business or the business of any of its Subsidiaries to be maintained and kept in good condition, repair and working order (reasonable wear and tear excepted) and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Board of Directors may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that the foregoing shall not prevent the Company from discontinuing the maintenance or operation of any of such properties if such discontinuance is, in the judgment of the management of the Company, desirable in the conduct of its business or the business of any of its Subsidiaries and is not disadvantageous in any material respect to the holders of the Securities; (b) preserve and keep in full force and effect the corporate existence, rights (charter and statutory), licenses and franchises of the Company and each of its Subsidiaries; provided, however, that the Company shall not be required to preserve any such right, license or franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries as a whole and that the loss thereof is not disadvantageous in any material respect to the holders of Securities; (c) maintain the books, accounts and records of the Company and its Subsidiaries in accordance with past custom and practice as used in the preparation of the Financial Statements except to the extent permitted or required by GAAP; (d) keep all of its and its Subsidiaries' properties which are of an insurable nature insured with insurers, believed by the Company in good faith to be financially sound and responsible, against loss or damage to the extent that property of similar character is usually so insured by corporations similarly situated and owning like properties (which may include self-insurance, if reasonable and in comparable form to that maintained by companies similarly situated); (e) comply with all material legal requirements and material contractual obligations applicable to the operations and business of the Company and its Subsidiaries and pay all applicable Taxes as they become due and payable; (f) permit representatives of any holder of the Securities and its agents (including their counsel, accountants and consultants), subject to the execution of a reasonable confidentiality agreement, to have reasonable access upon reasonable notice during business hours to the Company's books, records, facilities, key personnel, officers, directors, customers, independent accountants and legal counsel so long as such access does not violate any applicable Federal or state law or cause the loss of the attorney-client privilege; 28 (g) at all times (i) file all reports (including annual reports, quarterly reports and the information, documentation and other reports) required to be filed by the Company under the Exchange Act and Sections 13 and 15 of the rules and regulations adopted by the SEC thereunder, and the Company shall use its best efforts to file each of such reports on a timely basis, and take such further action as any holder or holders of the Securities, the Conversion Shares or the Warrant Shares may reasonably request (including providing copies of such reports to the holders of the Securities, the Conversion Shares or the Warrant Shares), all to the extent required to enable such holders to sell Securities pursuant to Rule 144 adopted by the SEC under the Securities Act (as such rule may be amended from time to time) or any similar rule or regulation hereafter adopted by the SEC and to enable the Company to register securities with the SEC on Form S-3 or any similar short-form registration statement and upon the filing of each such report deliver a copy thereof to each holder of the Securities, the Conversion Shares or the Warrant Shares, (ii) if the Company is no longer subject to the requirements of the Exchange Act, provide reports to the holders of the Securities, the Conversion Shares or the Warrant Shares in substantially the same form and at the same times as would be required if the Company were subject to the Exchange Act, and (iii) provide to each initial holder of the Securities, the Conversion Shares or the Warrant Shares and each other holder who has entered into a confidentiality agreement with the Company, pursuant to mutually agreeable terms, any material information distributed to the Board of Directors; (h) maintain at all times a valid listing for the Common Stock on a national securities exchange, the NASDAQ National Market System or the NASDAQ SmallCap Market; (i) maintain all material Intellectual Property Rights necessary to the conduct of its business and own or have a valid license to use all right, title and interest in and to, such material Intellectual Property Rights; (j) deliver Conversion Shares in accordance with the terms and conditions, and time periods, set forth in the Debentures; 29 (k) (i) Keep any property either owned or operated by it or any of its Subsidiaries free of any Environmental Liens or post bonds or other financial assurances sufficient to satisfy the obligations or liability evidenced by such Environmental Liens; (ii) comply, and cause its Subsidiaries to comply, in all material respects with Environmental Laws and shall provide to the Purchaser documentation of such compliance which the Purchaser reasonably requests; (iii) promptly notify the Purchaser of any Release of a Hazardous Material in excess of any reportable quantity from or onto property owned or operated by the Company, any of its Subsidiaries or, to the knowledge of the Company, any of its licensees and take any Remedial Actions required to abate said Release or otherwise to come into compliance with applicable Environmental Law; and (iv) promptly provide the Purchaser with written notice within ten (10) days of the receipt of any of the following: (a) notice that an Environmental Lien has been filed against any of the real or personal property of the Company, any of its Subsidiaries or, to the knowledge of the Company, any of its licensees; (b) commencement of any Environmental Action or notice that an Environmental Action will be filed against the Company or any Subsidiary; and (c) notice of a violation, citation or other administrative order which would reasonably be expected to cause a Material Adverse Effect; and (m) Take such actions and execute, acknowledge and deliver, and cause each of the Subsidiaries to take such actions and execute, acknowledge and deliver, at its sole cost and expense such agreements, instruments or other documents as the Purchaser may reasonably require from time to time in order to (i) carry out more effectively the purposes of this Agreement and the Related Documents, (ii) maintain the validity and effectiveness of any of the Related Documents, and (iii) to better assure, convey, grant, assign, transfer and confirm unto the Purchaser the rights now or hereafter intended to be granted to the Purchaser under this Agreement or any Related Document. 8.3 Reservation of Common Stock. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purposes of issuance upon conversion of the Debentures and the exercise of the Warrants, such number of shares of Common Stock as are issuable upon the conversion or exercise of all Debentures and all Warrants. All shares of Common Stock which are so issuable shall, when issued, be duly and validly issued, fully paid and nonassessable and free from all Taxes, liens and charges. The Company, at its sole cost and expense, shall take all such actions as may be necessary to assure that all such shares of Common Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which shares of Common Stock may be listed (except for official notice of issuance which shall be immediately transmitted by the Company upon issuance). 8.4 Payments Free of Withholding. All payments by the Company hereunder or under the Debentures or the Warrants shall be made free and clear of, and without any deduction for, any Tax imposed by any taxing jurisdiction, domestic or foreign. Article IX - REGISTRATION RIGHTS 9.1 Registration Rights. The Company, at its sole cost and expense, covenants to register or qualify or cause to be registered or qualified under applicable federal and state securities laws the sale and resale by the Purchaser of (i) all of the Conversion Shares, (ii) all of the Warrant Shares, and (iii) all of the additional shares of Common Stock issued or issuable to the Purchaser pursuant to this Agreement, if any, and to maintain such registration statement effective for all periods during which any portion of any Debenture may be converted or any Warrants may be exercised. The Company agrees to cause such registration or qualification to be filed with the United States Securities and Exchange Commission within 10 calendar days after the date of this Agreement. The Company agrees to cause such registration or qualification to become effective on or before the first date upon which any portion of any Debenture may be converted and to remain effective for all periods during which any portion of any Debenture may be converted or any Warrants may be exercised. If such registration or qualification does not become effective within 120 days after the date of this Agreement or remain effective thereafter as provided herein, the Purchaser may, at its sole option, demand that the Company redeem all or any portion of the Debentures as provided therein. If such registration or qualification, registering all of the specified shares of Common Stock, has not become effective on or before the first date upon which any portion of any Debenture may be converted, the Company hereby covenants and agrees to issue or cause to be issued to the Purchaser on such date and on every date which is 30 days or a multiple thereof after such date, until such registration or qualification shall become effective, additional shares of Common Stock equal in number to 10% of (i) the total number of shares of Common Stock issued or issuable upon conversion of all issued and outstanding Debentures or portions thereof which are convertible by the Purchaser and (ii) the additional shares of Common Stock issued or issuable to the Purchaser pursuant to this Agreement, if any, and to cause the sale and resale of all such additional shares to be included in the registration or qualification described herein. 9.2 Piggyback Registration Rights. The Company covenants that if at any time when any Debenture may be converted or any Warrant may be exercised the Company should file a non-underwritten registration statement or offering statement on behalf of the Company pursuant to applicable federal and state securities laws for a public offering of securities, the Company will provide written notification to the Purchaser at least 30 days but not more than 60 days prior to the filing date of such registration statement or offering statement and will register or qualify or cause to be registered or qualified, subject to the rights pursuant to which the registration or qualification is filed, at the option of the Purchaser and at the sole cost and expense of the Company, the sale and resale by the Purchaser of (i) all of the Conversion Shares, (ii) all of the Warrant Shares, and (iii) all of the additional shares of Common Stock issuable to the Purchaser pursuant to this Agreement, if any, and the Company will maintain such registration statement effective for all periods during which any Debentures may be converted or any Warrants may be exercised. Article X - SURVIVAL 10.1 Survival. The representations, warranties, covenants and agreements of the parties hereto contained herein, or in any writing delivered pursuant hereto, shall survive the Initial Closing and each Additional Closing of the transactions contemplated hereby and by the Related Documents notwithstanding any due diligence investigation conducted by or on behalf of Purchaser and until such time as all of the obligations of the parties hereto have been satisfied. Article XI - INDEMNIFICATION 30 11.1 Indemnification. In consideration of the Purchaser's execution and delivery of this Agreement and acquiring the Securities hereunder and in addition to all of the Company's other obligations under this Agreement, the Company shall defend, protect, indemnify and hold harmless, on an after-tax basis, the Purchaser and each other holder of the Securities and each of their respective officers, directors, employees and agents (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "Indemnitees") from and against any and all actions, causes of action, suits, claims, Environmental Actions, losses, costs, penalties, fees, liabilities, Environmental Liabilities and Costs and damages, and expenses (including, without limitation, costs of suit and attorneys' fees and expenses) in connection therewith (irrespective of whether any such Indemnitee is a party to the action for which indemnification hereunder is sought) (the "Indemnified Liabilities"), incurred by the Indemnitees or any of them as a result of, or arising out of, or relating to (a) the material breach or inaccuracy of any representation or warranty contained in this Agreement or any Related Document or any other instrument, agreement or document delivered to the Purchaser in accordance herewith or therewith, (b) the execution, delivery, performance or enforcement of this Agreement, any Related Document and any other instrument, document or agreement executed pursuant hereto or thereto by any of the Indemnitees, or (c) resulting from any material breach or inaccuracy of any representation, warranty, covenant or agreement made by the Company herein or in any Related Document. The Company shall reimburse the Indemnitees for the Indemnified Liabilities as such Indemnified Liabilities are incurred. To the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. Article XII - GENERAL PROVISIONS 12.1 Successors and Assigns. This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns, including each subsequent holder of Securities, Conversion Shares or Warrant Shares. Except as otherwise specifically provided herein, this Agreement shall not be assignable by the Company without the prior written consent of the Purchaser. 12.2 Entire Agreement. This Agreement and the other writings referred to herein or delivered pursuant hereto constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior oral or written arrangements or understandings. 12.3 Notices. All notices, requests, consents and other communications provided for herein shall be in writing and shall be (i) delivered in person, (ii) transmitted by telecopy, (iii) sent by registered or certified mail, postage prepaid with return receipt requested, or (iv) sent by reputable overnight courier service, fees prepaid, to the recipient at the address or telecopy number set forth below, or such other address or telecopy number as may hereafter be designated in writing by such recipient. Notices shall be deemed given upon personal delivery, upon receipt of return receipt in the case of delivery by mail, upon acknowledgment by the receiving telecopier or one day following deposit with an overnight courier service. 31 (1) If to the Company: Covol Technologies, Inc. 3280 North Frontage Road Lehi, Utah 84043 Telecopy: (801) 768-4483 Attention: Steven G. Stewart with a copy to (which shall not constitute notice to the Company): Callister, Nebeker & McCullough Ten East South Temple Salt Lake City, Utah 84133 Telecopy: (801) 364-9127 Attention: Richard T. Beard, Esq. (2) If to the Purchaser: Aspen Capital Resources, LLC 8989 South Schofield Circle Sandy, Utah 84093 Telecopy: (801) 501-9882 Attention: Joe K. Johnson with a copy to (which shall not constitute notice to the Purchaser): Corbridge Baird & Christensen 39 Exchange Place, Suite 100 Salt Lake City, Utah 84111 Telecopy: (801) 534-1948 Attention: James G. Swensen, Jr., Esq. 12.4 Purchaser Fees and Expenses. (a) The Company shall pay a placement fee to Aspen Capital Resources, LLC equal to 10% of the aggregate principal amount of Debentures issued pursuant to this Agreement, payable upon issuance of each Debenture. 32 (b) The Company shall reimburse the Purchaser upon demand for (i) the reasonable fees and expenses of counsel(s) to the Purchaser incurred in connection with the documentation, negotiation and consummation of the transactions contemplated by this Agreement and the Related Documents and (ii) reasonable due diligence expenses incurred by the Purchaser, limited to $25,000.00 in connection with the Initial Closing. The Company shall reimburse the Purchaser for the reasonable fees and expenses of counsel(s) to the Purchaser incurred in connection with any Additional Closing and any future amendment or waiver to this Agreement or any of the Related Documents, limited in the aggregate to $10,000.00, without the prior approval of the Company. (c) The Company also agrees to pay or cause to be paid, on demand, and to save the Purchaser harmless against liability for the payment of all reasonable out-of-pocket expenses incurred by the Company from time to time arising from or relating to: (i) the preservation and protection of any of the Company's rights under this Agreement or the Related Documents, (ii) the defense of any claim or action asserted or brought against the Purchaser by any Person that arises from or relates to this Agreement, any Related Document, the Purchaser's claims against the Company, or any and all matters in connection therewith, (iii) the commencement or defense of, or intervention in, any court proceeding arising from or related to this Agreement or any Related Document, (iv) the filing of any petition, complaint, answer, motion or other pleading by the Purchaser in connection with this Agreement or any Related Document, (v) any attempt to collect from the Company, or (vi) the receipt of any advice with respect to any of the foregoing. Without limitation of the foregoing or any other provision of any Related Document: (A) the Company agrees to pay all stamp, document, transfer, recording or filing taxes or fees and similar impositions now or hereafter determined by the Purchaser to be payable in connection with this Agreement or any Related Document, and the Company agrees to save the Purchaser harmless from and against any and all present or future claims, liabilities or losses with respect to or resulting from any omission to pay or delay in paying any such taxes, fees or impositions, and (B) if the Company fails to perform any covenant or agreement contained herein or in any Related Document, the Purchaser may itself perform or cause performance of such covenant or agreement, and the expenses of the Purchaser incurred in connection therewith shall be reimbursed on demand by the Company. 12.5 Amendment and Waiver. No amendment of any provision of this Agreement shall be effective, unless the same shall be in writing and signed by the Company and the Purchaser. Any failure of the Company to comply with any provision hereof may only be waived in writing by the Purchaser, and any failure of the Purchaser of the Securities, the Conversion Shares or the Warrant Shares to comply with any provision hereof may only be waived in writing by the Company. No such waiver shall operate as a waiver of, or estoppel with respect to, any subsequent or other failure. No failure by any party to take any action against any breach of this Agreement or default by any other party shall constitute a waiver of such party's right to enforce any provision hereof or to take any such action. 12.6 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one agreement. 33 12.7 Headings. The headings of the various sections of this Agreement have been inserted for reference only and shall not be deemed to be a part of this Agreement. 12.8 Remedies Cumulative. Except as otherwise provided herein, the remedies provided herein shall be cumulative and shall not preclude the assertion by any party hereto of any other rights or the seeking of any other remedies against any other party hereto. 12.9 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL SUBSTANTIVE LAWS OF THE STATE OF UTAH WITHOUT GIVING EFFECT TO THE LAWS OF CONFLICT OR CHOICE OF LAWS OF THE STATE OF UTAH OF ANY OTHER JURISDICTION THAT WOULD RESULT IN THE APPLICATION OF ANY LAWS OTHER THAN THOSE OF THE STATE OF UTAH. 12.10 CONSENT TO JURISDICTION; SERVICE OF PROCESS AND VENUE. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY RELATED DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF UTAH IN THE COUNTY OF SALT LAKE OR IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE PARTIES HEREBY IRREVOCABLY ACCEPT IN RESPECT OF THEIR PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. 12.11 No Third Party Beneficiaries. Except as specifically set forth or referred to herein, nothing herein is intended or shall be construed to confer upon any person or entity other than the parties hereto and their successors or assigns, any rights or remedies under or by reason of this Agreement. 12.12 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. IN WITNESS WHEREOF, the parties have caused their duly authorized officers to execute this Agreement as of the date first above written. COVOL TECHNOLOGIES, INC. Attest By: /s/ Harlan M. Hatfield By: /s/ Steven G. Stewart ---------------------------------- ------------------------------- Harlan M. Hatfield, General Counsel & Steven G. Stewart, Chief Financial Corporate Secretary Officer 34 By: /s/ Stanley M. Kimball -------------------------------- Stanley M. Kimball, Executive Vice President ASPEN CAPITAL RESOURCES, LLC By: /s/ Joe K. Johnson ---------------------- Joe K. Johnson, Manager 35 SCHEDULES Schedule 4.1 Subsidiaries Schedule 4.2 Existing Indebtedness Schedule 4.3 Capitalization Schedule 4.6(a) Certain Changes Schedule 4.6(c) Places of Business Schedule 4.7 Litigation Schedule 4.13 Owned Real Property Schedule 4.16 Intellectual Property Schedule 4.19 Environmental Laws Schedule 4.20 Transactions with Affiliates Schedule 4.21 Taxes Schedule 4.22 Other Investors Schedule 4.29 Registration Rights Schedule 4.30 Synthetic Fuel Facilities EXHIBITS Exhibit A Security Agreement Exhibit B Form of Convertible Secured Debenture Exhibit C Form of Warrant EX-10.2 4 ASPEN SECURITY AGREEMENT SECURITY AGREEMENT SECURITY AGREEMENT (this "Agreement"), dated as of September 17, 1999, by and between COVOL TECHNOLOGIES, INC.(the "Grantor"), a Delaware corporation with an address at 3280 North Frontage Road, Lehi, Utah 84043; and ASPEN CAPITAL RESOURCES, LLC (the "Lender"), a Utah limited liability company with an address at 8989 South Schofield Circle, Sandy, Utah 84093. The Grantor and Lender are parties to a Securities Purchase Agreement, dated as of the date hereof (as amended and modified from time to time, the "Purchase Agreement"), pursuant to which the Grantor will issue and sell and the Lender will purchase the convertible secured debentures (the "Debentures") of the Grantor. Capitalized terms used but not defined herein shall have the meanings given to such terms in the Purchase Agreement and the Debentures. The Lender has agreed to make certain loans to the Grantor. The obligation of the Lender to lend under the Debentures is conditioned on, among other things, the execution and delivery by the Grantor of this Agreement. Accordingly, the Grantor and the Lender, hereby agree as follows: 1. DEFINITIONS. As used herein, the following terms shall have the following meanings: "Code" means the Uniform Commercial Code as in effect in the State of Utah. "Collateral" means (a) all of the Grantor's right, title and interest in and to (i) that certain License and Binder Purchase Agreement, dated as of June 26, 1998, between the Grantor and Robena L.L.C. (the "Licensee"), a Delaware limited liability company, a copy of which is attached hereto as Exhibit "A" and incorporated herein by this reference, and (ii) all subsequent and future license agreements or similar agreements between the Grantor and Robena LLC, or the Grantor and any other party which relate to the facilities that are the subject of (i) above (collectively, as such agreements may be amended, restated or modified from time to time, the "License Agreement"), and (b) all proceeds of any and all of the foregoing Collateral and, to the extent not otherwise included, all payments under insurance (whether or not the Lender is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. "Obligations" means all indebtedness, obligations and other liabilities of the Grantor to the Lender now or hereafter arising pursuant to the Purchase Agreement, including, without limitation, the indebtedness evidenced by the Debentures. "Person" means any individual, partnership, joint venture, corporation, trust, unincorporated organization or other entity. The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms. In addition, the words "including," "includes" and "include" shall be deemed to be followed by the words "without limitation." 2. GRANT OF SECURITY INTEREST. The Grantor hereby pledges and grants a continuing security interest in, and a right of setoff against, the Collateral to the Lender, to secure payment, performance and observance by the Grantor of the Obligations. 3. REPRESENTATIONS AND WARRANTIES. The Grantor makes the representations and warranties set forth in this Section 3 to the Lender. 3.1 Necessary Filings. All filings, registrations and recordings necessary or appropriate or otherwise requested by Lender to create, preserve, protect and perfect the security interest granted by the Grantor to the Lender hereby in respect of the Collateral will be delivered to Lender upon execution of this Agreement or, if requested by Lender, will be delivered to Lender within three (3) Business Days after the date of such request. 3.2 Principal Location. The Grantor's mailing address, and the location of its chief executive office, is the address set forth in the preamble to this Agreement (as the same may be modified pursuant to Section 4.4); the Grantor has no other places of business. 3.3 No Other Names. The Grantor conducted business as Enviro-Fuels Technology during 1993 and 1994, as Environmental Technologies Group International during 1994 and 1995 and as Covol Technologies, Inc. since 1995. Except as discussed herein, the Grantor does not conduct and has not conducted since 1993 any trade or business under any name except the name in which it has executed this Agreement. The Grantor has not been a party to any merger or consolidation in the last five years. 3.4 No Financing Statements. No financing statement describing all or any portion of the Collateral which has not lapsed or been terminated has been filed in any jurisdiction except financing statements naming the Lender as secured party. 2 3.5 Patents. The Grantor owns and possesses all right, title and interest in and to, or has a valid and enforceable license to use, all patents described in the License Agreement. 3.6 License Agreement. Each License Agreement constitutes a legal, valid and binding obligation of the Grantor, enforceable by and against the Grantor in accordance with its terms, except to the extent limited by (a) applicable bankruptcy, insolvency, reorganization, moratorium and similar laws of general application related to the enforcement of creditor's rights generally and (b) general principles of equity. The Grantor is not in default, nor to the knowledge of the Grantor is there any basis for a valid claim of default, and to the Grantor's knowledge no event has occurred which, with notice or lapse of time, would constitute a default, under the License Agreement, and to the knowledge of the Grantor no licensee is in default under any such License Agreement. 3.7 Collateral. The Grantor has good title to the Collateral, free and clear of all claims, liens and encumbrances, except the security interest created by this Agreement. The Grantor has all requisite power and authority to pledge and grant the security interest in the Collateral for the purposes contemplated in this Agreement and to create a first lien on the Collateral in favor of the Lender and this Agreement shall create a valid first lien upon and perfected first priority security interest in the Collateral subject to no prior security interest, lien, encumbrance or other restriction. This Agreement, when executed, has been duly and validly executed and is the legal, valid and binding obligation of the Grantor and is enforceable against the Grantor by the Lender in accordance with its terms. 3.8 Claims. The Collateral is not the subject of any present or threatened suit, action, arbitration, administrative or other proceeding, and the Grantor knows of no reasonable grounds for the institution of any such proceedings. No authorization, approval or other action by, and not notice to or filing with, any governmental authority or regulatory body is required either (i) for the pledge by the Grantor of the Collateral pursuant to this Agreement or for the execution, delivery or performance of this Agreement by the Grantor or (ii) for the exercise by the Lender of any remedies with respect to the Collateral. 4. COVENANTS. Grantor hereby covenants and agrees that from the date of this Agreement, and thereafter until this Agreement is terminated: 4.1 Inspection and Verification. The Lender and such Persons as the Lender may designate shall have the right, at any reasonable time or times upon three (3) days prior notice and during Grantor's usual business hours, to inspect the Collateral, all records related thereto (and to make extracts and copies from such records), and the premises upon which any of the Collateral is located, to discuss Grantor's affairs with the officers of Grantor and their independent auditors to verify under reasonable procedures the validity, amount, quality, quantity, value and condition of, or any other matter relating to, the Collateral. 3 4.2 Records and Reports. The Grantor will maintain complete and accurate books and records with respect to the Collateral, and furnish to the Lender such reports relating to the Collateral as the Lender shall from time to time reasonably request. 4.3 Financing Statements and Other Actions. The Grantor will execute and deliver to the Lender all financing statements and amendments thereto and other documents, and take such other actions, as are from time to time reasonably requested by the Lender in order to perfect and to maintain and protect the validity, enforceability and perfected status of the first priority perfected security interest in the Collateral or to enable the Lender to exercise and enforce its rights and remedies hereunder with respect to the Collateral. 4.4 Change in Location or Name. The Grantor will not (a) maintain a place of business at any location other than the location specified in the preamble to this Agreement, (b) change its name, or (c) change its mailing address, unless, in each case, the Grantor shall have given the Lender at least thirty (30) days' prior written notice thereof, including the new address or name, and delivered any financing statements or other documents requested by the Lender. 4.5 Other Financing Statements. The Grantor will not sign or authorize the signing on its behalf of any financing statement naming it as debtor which covers all or any portion of the Collateral, except financing statements naming the Lender as secured party. 4.6 Exclusivity. The Grantor will not sell, convey or otherwise dispose of any interest in the Collateral or create, incur or permit to exist any pledge, mortgage, lien, charge or encumbrance or any security interest whatsoever in or with respect to any of the Collateral other than that created hereby, without the prior written consent of the Lender, which consent will not be unreasonably withheld.. 4.7 Defense. The Grantor will defend at its sole expense, the Lender's right, title and security interest in and to the Collateral against the claims of any person, firm, corporation or other entity. 4.8. Intellectual Property Covenants. The Grantor shall: (a) consistent with commercially reasonable practices, not perform or omit to perform any act whereby any patent rights necessary for the License Agreement may become dedicated, invalidated or unenforceable; (b) consistent with commercially reasonable practices, prosecute diligently any necessary patent, trademark or copyright application which is pending with respect to the License Agreement as of the date of this Agreement or hereafter and otherwise maintain all rights in and to the patents necessary under the License Agreement, including making all necessary filings and recordings and paying all required fees and taxes to record and maintain its registration and ownership of each such patent described in the License Agreement; 4 (c) not impair any of the Lender's rights of action described herein. 4.9 Grant of License to Use Patents. For the purpose of enabling the Lender to exercise its rights and remedies upon an Event of Default, the Grantor hereby grants to the Lender an irrevocable, nonexclusive license (exercisable without payment of royalty or other compensation to the Grantor) to use, license or sublicense any of the patents and all of the patent rights described in the License Agreement to the extent not inconsistent with the terms of the License Agreement, wherever the same may be located. Except as set forth in the preceding sentence, the Lender shall have no obligations or liabilities regarding any or all of the patents by reason of, or arising out of, this Agreement. 5. REMEDIES UPON DEFAULT. 5.1 Remedies upon Default. If any Event of Default shall occur, whether or not all of the Obligations shall have become due and payable, the Lender may, in addition to its rights under the Purchase Agreement and the Debentures, exercise any or all of the rights and remedies provided (i) in this Agreement, or (ii) to a secured party when a debtor is in default under a security agreement governed by the Code or any other applicable law. 5.2 Specific Performance. The Grantor agrees that, in addition to all other rights and remedies granted to the Lender in this Agreement and under the Debentures, the Lender shall be entitled to specific performance and injunctive and other equitable relief, and the Grantor further agrees to waive any requirement for the securing or posting of any bond or other security in connection with the obtaining of any such specific performance and injunctive or other equitable relief. 5.3 Grantor's Secured Liabilities Upon Event of Default. Upon the request of the Lender after the occurrence of an Event of Default, the Grantor will promptly: (a) Assemble and make available to the Lender the Collateral and all records relating thereto at the Company's principal place of business. (b) Permit the Lender, or the Lender's representatives and Lenders, to enter any premises where all or any part of the Collateral, or the books and records relating thereto, or both, are located, to take possession of all or any part of the Collateral and to remove all or any part of the Collateral. 5.4 Remedies Cumulative. All rights, powers and remedies contained in this Agreement or afforded by law shall be cumulative and all shall be available to the Lender until the Obligations have been paid in full. 5 6. WAIVERS, AMENDMENTS AND REMEDIES. No delay or omission of the Lender to exercise any right, power or remedy granted under this Agreement shall impair such right, power or remedy or be construed to be a waiver of any Event of Default or an acquiescence therein, and any single or partial exercise of any such right, power or remedy shall not preclude other or further exercise thereof or the exercise of any other right, power or remedy, and no waiver, amendment or other variation of the terms, conditions or provisions of this Agreement whatsoever shall be valid unless signed by each of the parties hereto, and then only to the extent specifically set forth in such writing. 7. COLLECTION OF RECEIVABLES; PROCEEDS. 7.1 Collection of Receivables. Grantor hereby covenants and agrees that the Lender may at any time after the occurrence of an Event of Default, by giving the Grantor written notice, elect to enforce collection of any proceeds of any and all of the Collateral, including any Earned Royalty and any payment of profits from sales of Proprietary Binder Material (each as defined in the License Agreement) and to require that such proceeds be paid directly to the Lender. In such event, the Grantor covenants and agrees to, and shall permit the Lender to, promptly notify the account debtors or obligors under the License Agreement of the Lender's interest therein and direct such account debtors or obligors to make payment of all amounts then or thereafter due under the License Agreement directly to the Lender. Upon receipt of any such notice from the Lender, the Grantor shall thereafter hold in trust for the Lender all amounts and proceeds received by it with respect to the License Agreement or any other Collateral, shall segregate all such amounts and proceeds from other funds of the Grantor, and shall at all times thereafter promptly deliver to the Lender all such amounts and proceeds in the same form as so received, whether by cash, check, draft or otherwise, with any necessary endorsements. 7.2 Payment of Proceeds from Collateral. Upon the receipt by the Licensee of notice from the Lender of the occurrence of an Event of Default by the Company pursuant to the Purchase Agreement or the Debentures issued pursuant thereto, the Grantor acknowledges and agrees that the Licensee shall (a) make no further payments to the Company under (i) the License Agreement, including any Earned Royalty (as defined in the License Agreement ), or (ii) any other agreement between the Company and the Licensee with respect to the Facility, and (b) make all payments otherwise due to the Company under (i) the License Agreement , including any Earned Royalty, or (ii) any other agreement between the Company and the Licensee with respect to the Facility, to the Lender as specified by the Lender in the notice referred to above. 6 The Grantor further acknowledges and agrees that, notwithstanding anything to the contrary contained in Section 3.4 of the License Agreement, (i) payments with respect to the License Agreement, including Earned Royalty shall be due as specified in Section 3.4 of the License Agreement and (ii) payments shall be made in accordance with this Agreement and shall be deemed paid when paid to the Lender. The Grantor further acknowledges and agrees that payments made by the Licensee to the Lender under this Agreement shall be deemed to satisfy the Licensee's corresponding payment obligations under the Licence Agreement. The Grantor hereby agrees to continue to perform all of its obligations under the License Agreement. 7.3 Application of Proceeds. (a) Upon the occurrence of an Event of Default, the Lender shall have the continuing and exclusive right to apply or reverse and re-apply any and all payments to any portion of the Obligations. To the extent that the Grantor makes a payment or payments to the Lender or the Lender receives any payment or proceeds of the Collateral, which payment or proceeds or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then, to the extent of such payment or proceeds, the Obligations or part thereof intended to be satisfied and this Agreement shall be revived and continue in full force and effect, as if such payment or proceeds had not been received by such party. (b) Should the Lender receive proceeds of the Collateral, the Lender shall apply the proceeds of such amounts withdrawn as follows: FIRST, to the payment of all reasonable costs and expenses incurred by the Lender in connection with such collection or sale or otherwise in connection with this Agreement or any of the Obligations, including but not limited to all court costs and the reasonable fees and expenses of its Lenders and legal counsel, the repayment of all advances made by the Lender hereunder on behalf of the Grantor and any other costs or expenses incurred in connection with the exercise of any right or remedy hereunder. SECOND, to the payment in full of all unpaid interest and penalties on the Debentures. THIRD, to the payment in full of the unpaid principal amount of the Debentures, to be applied on a pro rata basis. FOURTH, to the payment and discharge in full of the Obligations (other than those referred to above). FIFTH, to the Grantor, its successors or assigns, or as a court of competent jurisdiction may otherwise direct. 8. GENERAL PROVISIONS. 7 8.1 Compromises and Collection of Collateral. The Grantor recognizes that setoffs, counterclaims, defenses and other claims may be asserted by obligors with respect to certain of the proceeds of any and all of the Collateral, including any Earned Royalty and any payment of profits from sales of Proprietary Binder Material, that certain of such proceeds may be or become uncollectible in whole or in part and that the expense and probability of success in litigating disputed Collateral proceeds may exceed the amount that reasonably may be expected to be recovered with respect to such Collateral proceeds. In view of the foregoing, the Grantor agrees that the Lender may at any time and from time to time compromise with the obligor on any Collateral proceeds, accept in full payment of any Collateral proceeds such amount as the Lender in its sole discretion shall determine, or abandon any Collateral proceeds, and any such action by the Lender shall be commercially reasonable so long as the Lender acts in good faith based on information known to it at the time it takes any such action. 8.2 Secured Party Performance of Grantor Secured Liabilities. Without having any obligation to do so, the Lender may, upon notice to the Grantor, perform or pay any obligation which the Grantor has agreed to perform or pay in this Agreement but has not performed or paid and the Grantor shall reimburse the Lender for any amounts paid or incurred pursuant to this Section 8.2. The Grantor's obligation to reimburse the Lender pursuant to the preceding sentence shall be an Obligation payable on demand and shall bear interest at the rate of 2.5% per month from the date of payment until payment in full. 8 8.3 Authorization for Secured Party To Take Certain Action. Upon the occurrence of an Event of Default or with the consent of the Grantor, which consent shall not be unreasonably withheld, the Grantor irrevocably authorizes the Lender at any time and from time to time in the sole discretion of the Lender, and irrevocably appoints the Lender as its attorney-in-fact to act on behalf of the Grantor, in the name of the Grantor or otherwise, from time to time in the Lender's discretion, to take any action and to execute any instrument which the Lender may deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation (a) to execute on behalf of the Grantor as debtor and to file financing statements necessary or desirable in the Lender's sole discretion to perfect and to maintain the perfection and priority of the Lender's security interest in the Collateral; (b) to endorse, deposit and collect any cash and other proceeds of the Collateral; (c) to file a carbon, photographic or other reproduction of this Agreement or any financing statement with respect to the Collateral as a financing statement in such offices as the Lender in its sole discretion deems necessary or desirable to perfect and to maintain the perfection and priority of the Lender's security interest in the Collateral; (d) to enforce payment of the Earned Royalty and the payments from sales of Proprietary Binder Material in the name of the Lender or the Grantor; (e) to cause the proceeds of any Collateral received by the Lender to be applied to the Obligations; (f) to sign the Grantor's name on any invoice or bill of lading relating to any Collateral, including any Earned Royalty and Proprietary Binder Material profits, on drafts against customers, on schedules and assignments of such Collateral, on notices of assignment, financing statements and other public records, on verifications of accounts and on notices to licensees; (g) to send requests for verification of any Collateral or any proceeds therefrom, including Earned Royalty and Proprietary Binder Material profits to licensees or account debtors (provided that this clause (g) shall not limit the Lender's rights under Section 4.01); (h) to do all things necessary to carry out this Agreement; (i) to grant or issue any exclusive or nonexclusive license under the Collateral to any Person, to the extent consistent with the terms of the License Agreement, and (j) to assign, pledge, convey or otherwise transfer title in or to or dispose of the Collateral to anyone, including without limitation, to make assignments, recordings, registrations and applications therefor in the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency of the United States, any State thereof or any other country or political subdivision thereof, and to execute and deliver any and all agreements, documents, instruments of assignment or other papers necessary or advisable to effect any of the foregoing or the recordation, registration, filing or perfection thereof. The Grantor ratifies and approves all acts of such attorney-in-fact. The Lender will not be liable for any acts or omissions except those determined pursuant to a final, non-appealable order of a court of competent jurisdiction to have resulted solely from the Lender's gross negligence or willful misconduct. The power conferred on the Lender hereunder is solely to protect its interests in the Collateral and shall not impose any duty upon the Lender to exercise such power. This power, being coupled with an interest, is irrevocable. 8.4 Grantor Remains Liable. Anything contained in this Agreement to the contrary notwithstanding, (a) the Grantor shall remain solely liable to perform its duties and obligations under the License Agreement included in the Collateral to the extent set forth therein to the same extent as if this Agreement had not been executed, (b) the exercise by the Lender of any of its rights and remedies hereunder shall not release any Grantor from any of its duties or obligations under the License Agreement included in the Collateral except to the extent the exercise of such rights renders the performance of such duties or obligations by the Grantor impracticable under any such agreement or contract, and (c) the Lender shall not have any obligation or liability under any License Agreement included in the Collateral by reason of this Agreement, and the Lender shall not be obligated in any manner to perform any of the obligations or duties of the Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. 9. MISCELLANEOUS 9.1 Security Interest Absolute. All rights of the Lender hereunder, the security interest granted hereby, and all obligations of the Grantor hereunder, shall be absolute and unconditional irrespective of (a) any lack of validity or enforceability of the Debentures, any agreement with respect to any of the Obligations or any other agreement or instrument relating to any of the foregoing, (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the Debentures or any other agreement or instrument, (c) any exchange, release or non-perfection of any other Collateral, or any release, amendment or waiver of, or consent to or departure from, any guaranty for all or any of the Obligations, or (d) any other circumstance which might otherwise constitute a defense available to, or a discharge of, the Grantor in respect of the Obligations or in respect of this Agreement. 9 9.2 Lender's Fees and Expenses; Indemnification. (a) The Grantor agrees to pay upon demand to the Lender the amount of all reasonable expenses, including the fees and expenses of its counsel and of any experts of the Lender, which the Lender may incur in connection with (i) the administration of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of the Lender hereunder, or (iv) the failure by the Grantor to perform or observe any of the provisions hereof. (b) Without limitation of its indemnification obligations under the Purchase Agreement or any Related Documents (as defined in the Purchase Agreement) the Grantor agrees to indemnify the Lender against, and defend and hold it harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable fees, disbursements and other charges of counsel, incurred by or asserted against it arising out of, in any way connected with, or as a result of, the execution, delivery or performance of this Agreement or any claim, litigation, investigation or proceeding relating hereto or to the Collateral, whether or not the Lender is a party thereto; provided that such indemnity shall not, as to the Lender, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of the Lender. (c) Any such amounts payable as provided hereunder shall be additional Obligations secured by this Agreement. The provisions of this Section 9.2 shall remain operative and in full force and effect regardless of the termination of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Debentures, the invalidity or unenforceability of any term or provision of this Agreement, or any investigation made by or on behalf of the Lender. All amounts due under this Section 9.2 shall be payable on written demand therefor and shall bear interest at the rate of 2.5% per month from the date incurred by Lender until paid in full 9.3 No Amendment of License the Agreements. The Grantor hereby agrees not to amend or waive any provision of the License Agreements without the written consent (which shall not be unreasonably withheld) of the Lender. 9.4 Binding Agreement; Assignments. This Agreement, and the terms, covenants and conditions hereof, shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, except that the Grantor shall not be permitted to assign this Agreement or any interest herein or in the Collateral or any part thereof, or otherwise pledge, encumber or grant any option with respect to the Collateral or any part thereof, or any cash or property held by the Lender as Collateral under this Agreement, except as contemplated by this Agreement or the Debentures. 10 9.5 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL SUBSTANTIVE LAWS OF THE STATE OF UTAH WITHOUT GIVING EFFECT TO THE LAWS OF CONFLICT OR CHOICE OF LAWS OF THE STATE OF UTAH OR ANY OTHER JURISDICTION THAT WOULD RESULT IN THE APPLICATION OF ANY LAWS OTHER THAN THOSE OF THE STATE OF UTAH. 9.6 Consent to Jurisdiction and Service of Process. With respect to jurisdiction, service of process, jury trial and all other procedural matters the Grantor agrees that the provisions of Section 12.11 of the Purchase Agreement apply to this Agreement mutatis mutandis. 9.7 Notices. All communications and notices hereunder shall be in writing and given as provided in the Debentures. 9.8 Severability. In case any one or more of the provisions contained in this Agreement should be invalid, illegal or unenforceable in any respect, no party hereto shall be required to comply with such provision for so long as such provision is held to be invalid, illegal or unenforceable and the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired. The parties shall endeavor in good-faith negotiations to replace the invalid, illegal and unenforceable provisions with valid provisions, the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. 9.9 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument. 9.10 Termination. (a) This Agreement and the security interest granted hereby shall terminate only after all the Obligations have been indefeasibly paid in full and the Lender has no further commitment to lend under the Debentures, at which time the Lender shall execute and deliver to the Grantor all Uniform Commercial Code termination statements and similar documents prepared by the Grantor which the Grantor shall reasonably request to evidence such termination. (b) Notwithstanding anything to the contrary contained in this Agreement, this Agreement shall remain in full force and effect and continue to be effective should any petition be filed by or against the Grantor for liquidation or reorganization, should the Grantor become insolvent or make an assignment for any benefit of creditors or should a receiver or trustee be appointed for all or any significant part of the Grantor's assets, and shall continue to be effective or be reinstated, as the case may be, if at any time payment and performance of the obligations, or any part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by any obligee of the obligations, whether as a "voidable preference", "fraudulent conveyance" or otherwise, all as though such payment, or any part thereof, is rescinded, reduced, restored or returned. 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. Grantor: COVOL TECHNOLOGIES, INC. Attest: /s/ Harlan M. Hatfield By: /s/ Steven G. Stewart - ------------------------------------- ---------------------------------- Harlan M. Hatfield, General Counsel & Steven G. Stewart, Chief Financial Corporate Secretary Officer By: /s/ Stanley M. Kimball ---------------------------------- Stanley M. Kimball, Executive Vice President Lender: ASPEN CAPITAL RESOURCES, LLC By: /s/ Joe K. Johnson ---------------------------------- Joe K. Johnson, Manager 12 EX-23.1 5 PRICEWATERHOUSECOOPERS LLP CONSENT CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in this Registration Statement on Form S-3 of our report, which includes an explanatory paragraph relating to the restatement of the 1998 and 1997 financial statements, dated December 22, 1998, except for the last paragraph of Note 1, as to which the date is October 5, 1999, relating to the consolidated financial statements which appears in Covol Technologies, Inc.'s Annual Report on Form 10-K/A for the year ended September 30, 1998. We also consent to the reference to us under the heading "Experts" in such Registration Statement. PRICEWATERHOUSECOOPERS LLP Salt Lake City, Utah October 5, 1999 -----END PRIVACY-ENHANCED MESSAGE-----