CONVERTIBLE LOAN AND SECURITY AGREEMENT

                                     between

                            COVOL TECHNOLOGIES, INC.

                                       and

                       PACIFICORP FINANCIAL SERVICES, INC.

                           Dated as of March 20, 1997



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                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----

RECITALS...................................................................... 1


ARTICLE I - DEFINITIONS............. ......................................... 1

    SECTION 1.01.  Certain Defined Terms...................................... 1
    SECTION 1.02.  Accounting Terms...........................................10
    SECTION 1.03.  Other Terms................................................10


ARTICLE II - THE INDEBTEDNESS.................................................11

    SECTION 2.01.  The Commitment and the Term loans; Note....................11
    SECTION 2.02.  Repayment..................................................13
    SECTION 2.03.  Payments and Computations..................................13
    SECTION 2.04.  Taxes.... .................................................14
    SECTION 2.05.  Late Payments..............................................15


ARTICLE III - ACKNOWLEDGMENT AND CREATION OF SECURITY
         INTEREST.............................................................16

    SECTION 3.01.  Acknowledgment and Creation of
                     Security Interest........................................16
    SECTION 3.02.  Duty of Care...............................................16
    SECTION 3.03.  Release of Liens and Security
                     Interests................................................16

<PAGE>

    SECTION 3.04.  Continuation of Liens and Security.........................17
    SECTION 3.05.  Insurance Proceeds.........................................17


ARTICLE IV - REPRESENTATIONS AND WARRANTIES...................................18

    SECTION 4.01.  Corporation in Good Standing...............................18
    SECTION 4.02.  Due Authorization..........................................18
    SECTION 4.03.  Pending and Threatened Actions.............................18
    SECTION 4.04.  Disclosure.................................................18
    SECTION 4.05.  Valid and Binding Obligations..............................19
    SECTION 4.06.  Payment of Taxes...........................................19
    SECTION 4.07.  Title to Collateral and Liens..............................19
    SECTION 4.08.  Defaults...................................................19
    SECTION 4.09.  Permits.. .................................................19
    SECTION 4.10.  Principal Place of Business:
                     Jurisdictions Where Doing Business:
                     Fiscal Year..............................................19
    SECTION 4.11.  ERISA.... .................................................20
    SECTION 4.12.  Subordination..............................................20


                                       i
<PAGE>

    SECTION 4.13   Government Approval........................................20
    SECTION 4.14   Securities and Exchange Act;
                     Investment Company Act...................................20
    SECTION 4.15   Regulation U...............................................20
    SECTION 4.16   Strikes, Etc...............................................20
    SECTION 4.17   Adverse Agreements.........................................20
    SECTION 4.18   Trade Names and Intellectual Property......................21
    SECTION 4.19   Location of Collateral.....................................21
    SECTION 4.20   Possession of Collateral...................................21
    SECTION 4.21   Validity and Priority of Security
                     Interests................................................21
    SECTION 4.22   Accounts ..................................................21
    SECTION 4.23   Agreements with Related Persons............................21


ARTICLE V - COVENANTS OF BORROWERS............................................22

    SECTION 5.01.  Affirmative Covenants......................................22
    SECTION 5.02.  Negative Covenants.........................................27
    SECTION 5.03.  Collateral.................................................30

<PAGE>

ARTICLE VI - DEFAULT................ .........................................32

    SECTION 6.01.  Events of Default..........................................32


ARTICLE VII - RIGHTS, POWERS AND REMEDIES UPON DEFAULT........................35

    SECTION 7.01.  Remedies...................................................35
    SECTION 7.02.  Protection and Preservation of
                     Collateral and Rights;
                     Protective Advances......................................37
    SECTION 7.03.  Election...................................................37
    SECTION 7.04.  Waiver... .................................................37
    SECTION 7.05.  Power of Attorney..........................................38
    SECTION 7.06.  Entry Upon Premises........................................38
    SECTION 7.07.  Notification of Customers..................................39
    SECTION 7.08.  Failure to Pay.............................................39
    SECTION 7.09.  Application of Collateral Proceeds.........................39
    SECTION 7.10.  Enforcement of Borrower's Rights...........................39
    SECTION 7.11.  Exercise of Remedies.......................................40
    SECTION 7.12.  Equitable Remedies.........................................40


ARTICLE XIII GENERAL PROVISIONS...............................................40

    SECTION 8.01.  Survival of Terms..........................................40
    SECTION 8.02.  Presentment................................................41
    SECTION 8.03.  Successors and Assigns.....................................41
    SECTION 8.04.  Number... .................................................41


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<PAGE>

    SECTION 8.05.  Governing Law..............................................41
    SECTION 8.06.  Notices and Addresses; Payments............................42
    SECTION 8.07.  Severability; Independence of Covenants....................42
    SECTION 8.08.  Time..... .................................................42
    SECTION 8.09.  Necessity of Writing.......................................42
    SECTION 8.10.  Integration................................................43
    SECTION 8.11.  Captions...................................................43
    SECTION 8.12.  Lender's Expenses and Attorneys' Fees......................43
    SECTION 8.13.  Indemnification............................................44
    SECTION 8.14.  Agreement Governs..........................................45
    SECTION 8.15.  Third Party Beneficiaries..................................45
    SECTION 8.16.  Jurisdiction...............................................45
    SECTION 8.17.  Consent to Loan Participation..............................43
    SECTION 8.18.  Waiver of Jury Trial.......................................46
    SECTION 8.19.  Execution in Counterparts..................................47


ARTICLE IX - ENVIRONMENTAL PROVISIONS.........................................47

    SECTION 9.01.  Definitions................................................47
    SECTION 9.02.  Representations and Warranties.............................48
    SECTION 9.03.  Covenants..................................................48
    SECTION 9.04.  Borrower's Remedial Work...................................49
    SECTION 9.05.  Indemnity..................................................50
    SECTION 9.06.  Remedies Upon Default......................................51
    SECTION 9.07.  Continuing Obligations.....................................52
    SECTION 9.08.  Other Laws.................................................52
    SECTION 9.09.  Security Interest..........................................52


ARTICLE X - CONVERSION RIGHTS.................................................52

    SECTION 10.01. Conversion.................................................52
    SECTION 10.02. Mechanics of Conversion....................................53
    SECTION 10.03. Current Conversion Price...................................54
    SECTION 10.04. Adjustment of Conversion Price.............................55
    SECTION 10.05. Issuer's Consolidation or Merger...........................61
    SECTION 10.06. Notice to Lender...........................................62

Exhibit l.01.TN - Note
Exhibit 5.01.R - Opinion of Counsel


                                       iii
<PAGE>
                     CONVERTIBLE LOAN AND SECURITY AGREEMENT


     THIS CONVERTIBLE LOAN AND SECURITY  AGREEMENT (this "Agreement") is made as
of  March  20,  1997,  by and  between  COVOL  TECHNOLOGIES,  INC.,  a  Delaware
corporation  ("Borrower"),  and PACIFICORP  FINANCIAL SERVICES,  INC., an Oregon
corporation ("Lender").


                                    RECITALS

     Borrower desires to borrow up to $5,000,000 (i) to complete construction by
Borrower of the coal briquetting facility to be located in Birmingham,  Alabama,
known as Alabama  Synfuel #1 Ltd. (the "Alabama  Project"),  (ii) to finance the
acquisition by Borrower for the benefit of the Alabama  Project of up to 100,000
tons of coal fines to be stored at the Port  Hodder  site,  (iii) for funding of
net working capital needs of the Alabama Project, as approved by Lender, (iv) to
finance the  development  and  construction of a wash plant for coal fines, at a
location,  price and with specifications  approved by Lender, and (v) other uses
by Borrower, as approved by the Lender in its sole discretion.  In addition, the
parties  wish to provide  that Lender may elect to convert all or any portion of
the then  outstanding  principal and interest  owing under this  Agreement  into
shares of common stock, par value $.001 per share ("Borrower Common Stock"),  of
Borrower.  Upon the  terms  and  subject  to the  conditions  set  forth in this
Agreement, and in consideration of the mutual covenants and agreements exchanged
herein, Borrower and Lender agree as follows:


                                    ARTICLE I
                                   DEFINITIONS

     SECTION  1.01.  Certain  Defined  Terms.  As used in  this  Agreement,  the
following  terms shall have the  following  meanings  (which  meanings  shall be
equally applicable to both the singular and plural forms of the terms defined):

          "Account" shall have the meaning given to that term in the Code.

          "Account Debtor" means any Person who is obligated on an Account.

          "Accounts Payable" means the accounts payable of Borrower.

          "Additional Common Stock" is defined in Section 10.04.C.

          "Alabama Project" is defined in the Recitals.

          "Alabama  Project  Purchase   Agreement"  means  the  Alabama  Project
Purchase  Agreement,  dated as of the date hereof,  between Borrower and Alabama
Synfuel #1 Ltd., and Birmingham Syn Fuel, L.L.C.

          "Attorneys'  Fees"  means  the  reasonable  fees  (and all  costs  and
expenses  related thereto) for the services of the attorneys (and all paralegals
and other staff employed by such attorneys) employed by Lender from time to time
(i) in  connection  with or arising  out of any  bankruptcy  case,  receivership
proceeding,  or similar proceeding involving Borrower; (ii) to commence,  defend
or intervene in any court  proceeding  (whether at the trial or appellate level)
or arbitration proceeding, or to file a petition,  complaint,  answer, motion or
other pleading, or to take any other action in or with respect to any case, suit
or proceeding  (bankruptcy or otherwise) relating to the Transaction  Documents,
the Collateral, the Obligations, or any other agreement,  document or instrument
in any way relating to the  Transaction  Documents or the  relationship  between
Borrower and Lender;  (iii) after the occurrence and during the continuance of a
Default or Event of Default,  to advise  Lender with respect to the  Transaction
Documents or any other  agreement,  document or  instrument  in any way relating
thereto or the  relationship  between  Borrower  and  Lender;  (iv) to  protect,
collect, lease, sell, take possession of, or liquidate any of the Collateral and
any other  property,  rights or interests  owned or held by Lender to secure the
payment and performance of the Obligations,  to enforce or to attempt to enforce
any security interest in any of the Collateral and any other property, rights or
interests  owned or held by Lender to secure the payment and  performance of the
Obligations, or to give any advice with respect to such enforcement;  and (v) to
enforce any of Lender's rights to collect any of the Obligations.

          "Borrower Common Stock" is defined in the Recitals.

          "Business Day" means any day other than a Saturday, a Sunday, a public
or bank holiday under the laws of the State of Utah.

          "Cash and Cash Equivalents"  means the aggregate amount of (i) cash on
hand,  (ii) Dollar  demand  deposits  maintained  in the United  States with any
federally insured or state chartered  financial  institution,  (iii) Dollar time
deposits maintained in the United States with, or certificatesof deposit issued


                                        2
<PAGE>


by, any federally insured or state chartered financial institution,  (iv) direct
obligations of, or unconditionally guaranteed by, the United States and having a
maturity of one year or less, and (v) readily marketable commercial paper having
a maturity of one year or less, issued by any corporation organized and existing
under the laws of the  United  States or any state  thereof or the  District  of
Columbia.

          "Code"  means the  Uniform Commercial  Code as enacted in the State of
Utah.

          "Collateral"  means (a) all personal  property assets of Borrower used
or useful in  connection  with the  Alabama  Project,  whether  now  existing or
hereafter  acquired or arising,  and wherever  located,  tangible or intangible,
including:

           (i) All  Equipment used  or useful  in  connection  with  the Alabama
Project;

           (ii) All  Inventory  produced by,  and  used  or useful in connection
with, the Alabama Project;

           (iii)  All  Computer   Hardware  and   Software  used  or  useful  in
connection with the Alabama Project;

           (iv) All Accounts, contract rights, notes receivable,  chattel paper,
instruments,  Intangibles,  Cash and Cash  Equivalents,  stock and other  equity
securities, tax refunds and tax refund claims, trademarks,  service marks, trade
styles,  trade names,  copyrights,  patents and other  intellectual  property of
Borrower used or useful in connection with the Alabama  Project,  all depository
accounts or deposits by Borrower in connection with the Alabama Project with any
Person,  documents,  documents of title,  and other property  rights of any kind
used or useful in connection with the Alabama Project,  whether now or hereafter
existing,  wherever located,  together with all rights now or hereafter existing
in and to all security agreements,  leases of personal property,  leases of real
property,  and  other  contracts  securing  or  otherwise  relating  to any such
Accounts,  contract  rights,  notes  receivable,   chattel  paper,  instruments,
Intangibles,  Cash and Cash Equivalents,  stock and other equity securities, tax
refunds and tax refund claims,  trademarks,  service marks, trade styles,  trade
names,  copyrights,  patents and other intellectual property of Borrower used or
useful in connection with the Alabama Project;

               (v) All  Proceeds  and  products of any and all of the  foregoing
property and, to the extent not otherwise included, all payments under insurance
(whether or not Lender is the loss payee thereof), and all claims, indemnities,


                                        3
<PAGE>

warranties  or  guarantees,  payable by reason of loss or damage to or otherwise
with  respect to any of the  foregoing  property,  and all  property of any type
described  above that is acquired with any cash proceeds of any of the foregoing
property; and

(b) all  interests of Borrower in the real  property  covered by the  Collateral
Assignment  of Lease and all other  real  property  assets of  Borrower  used or
useful in connection with the Alabama Project, and all rents, income, issues and
profits thereof.

          "Collateral  Assignment  of Lease"  means a Collateral  Assignment  of
Lease  executed and delivered by Borrower and Lender,  securing the  Obligations
hereunder, together with the Consent of Parker towing Company, Inc., in form and
substance reasonably satisfactory to Lender.

          "Commitment" is defined in Section 2.01.A hereof.

          "Commitment Period" is defined in Section 2.01.A hereof.

          "Computer  Hardware and Software" means all of Borrower's right, title
and  interest,  now owned or  hereafter  acquired,  in  computer  equipment  and
hardware including all central processing units,  terminals,  disk drives,  tape
drives, electronic memory units, printers,  keyboards, screens, peripherals (and
other input/output devices), modems and other communication controllers, and any
and  all  model  conversions,   accessions,  parts  and  appurtenances  thereto,
substitutions  therefor and replacements thereof, all intellectual property used
by Borrower,  at any time,  in the  operation  of such  computer  equipment  and
hardware,  including  all  software,  all of  Borrower's  rights  (to the extent
assignable) under any licenses, options, warranties,  service contracts, program
services, test rights,  maintenance rights, support rights,  improvement rights,
and renewal  rights  related to  Borrower's  use, at any time,  of such computer
equipment,  hardware or  software,  and all leases  pursuant  to which  Borrower
leases any computer equipment, hardware or software.

          "Construction  Assignment  Agreement" means a Collateral Assignment of
Construction Agreement to be executed and delivered by Borrower, Alabama Synfuel
#1, Ltd. and Lender, securing the Obligations hereunder, together with a Consent
and Agreement executed and delivered by TIC The Industrial  Company, in form and
substance reasonably satisfactory to Lender.

          "Conversion" is defined in Section 10.01.B hereof.


                                        4
<PAGE>

          "Conversion Price" is defined in Section 10.03 hereof.

          "Current Conversion Price" is defined in Section 10.03 hereof.

          "Current  Liabilities" means for Borrower,  on a consolidated basis in
accordance  with  GAAP,  (i) all Debt which by its terms is payable on demand or
matures  within  one year  from the date of  determination  (excluding  any Debt
renewable or  extendable,  at the option of the debtor,  to a date more than one
year from such date or arising  under a  revolving  credit or similar  agreement
which  obligates  the lender or lenders to extend credit during a period of more
than one year from such date) and (ii) all other items  (including taxes accrued
as  estimated)  which in  accordance  with GAAP  would be  included  as  current
liabilities.

          "Debt"  means,   for  any  Person,   (i)  all  indebtedness  or  other
obligations of such Person for borrowed money or for the deferred purchase price
of property or  services,  (ii) all  indebtedness  created or arising  under any
conditional  sale or other title  retention  agreement  with respect to property
acquired by such Person  (even  though the rights and  remedies of the seller or
lender under such agreement in the event of default are limited to  repossession
or sale of such property),  (iii) all obligations  under leases which shall have
been or should be, in  accordance  with  GAAP,  recorded  as  capital  leases in
respect of which such Person is liable as lessee, (iv) liabilities in respect of
unfunded vested benefits under any ERISA Plan, (v) all Guaranteed  Indebtedness,
and (vi) (to the extent not  otherwise  covered  by clauses  (i),  (ii) or (iii)
above) all Debt of the type  referred  to in clauses  (i),  (ii) or (iii)  above
secured  by (or for  which  the  holder  of such  Debt  has an  existing  right,
contingent or otherwise,  to be secured by) any lien, security interest or other
charge or encumbrance upon or in property owned by such Person, even though such
Person has not assumed or become liable for the payment of such debt.

          "Default"  means the  occurrence of an act,  event or condition  which
would  constitute  an  Event  of  Default  under  this  Agreement  but  for  the
requirement that notice be given or time elapse or both.

          "Default  Interest Rate" means, for any day, a rate per annum equal to
the lesser of (a) the  highest  rate  allowed by law,  or (b) the sum of (i) the
rate of interest publicly announced by Morgan Guaranty Trust Company of New York
in New York City from time to time as its "prime  rate",  and (ii) five  percent
(5%) per annum.


                                        5
<PAGE>

          "Distributions on Common Stock" is defined in Section 10.04.B hereof.

          "Dollars" and the sign "$" each  means  lawful  money  of  the  United
States.

          "Early Termination Date" is defined in Section 2.01(D) hereof.

          "Employee Group" shall include any Person who was, has been or becomes
an officer or director of Borrower at any time on or after the  Effective  Date.
The Employee  Group as of the date of this  Agreement is  identified on Schedule
1.01.EG attached hereto.

          "Environmental   Report"   means  the  Phase  I   Environmental   Site
Assessment,  dated  as of  September  18,  1996,  prepared  by  Lockwood  Greene
Technologies, Inc.

          "Equipment"  means all  equipment (as defined in the Code) of Borrower
in all of its forms, wherever located, now or hereafter existing.

          "ERISA" means the Employee  Retirement Income Security Act of 1974, as
amended from time to time.

          "ERISA Plan" means, for any Person,  an employee benefit plan or other
plan maintained for employees of such Person and covered by Title IV of ERISA.

          "Event of Default" is defined in Section 6.01 hereof.

          "GAAP" means generally  accepted United States  accounting  principles
consistently applied, as in effect from time to time.

          "Good  Faith"  means  honesty in fact in the  conduct  or  transaction
concerned,   without  regard  to  whether   standards   which  might  be  deemed
commercially reasonable have been observed.

          "Guaranteed  Indebtedness" of any Person means all Debt referred to in
clause (i),  (ii) or (iii) of the  definition  of "Debt" in this Section 1.01 of
any other Person guaranteed directly or indirectly in any manner by such Person,
or in effect guaranteed  directly or indirectly by such Person through agreement
(i) to pay or purchase  such Debt or to advance or supply  funds for the payment
or  purchase  of such  Debt,  or (ii) to  purchase,  sell or lease (as lessee or
lessor) property, or to purchase or sell  services, primarily for the purpose of


                                        6
<PAGE>

enabling  the  debtor to make  payments  of such Debt or to assure the holder of
such  Debt  against  loss,  or (iii) to supply  funds to or in any other  manner
invest in the debtor  (including  any  agreement to pay for property or services
irrespective  of whether or not such  property is received or such  services are
rendered) or (iv) otherwise to assure a creditor against loss.

          "Intangibles" means (i) goodwill,  organizational  expenses,  research
and development expenses,  trademarks, trade names, copyrights,  patents, patent
applications, licenses and rights in any thereof, and other similar intangibles,
(ii) all unamortized  debt discount and expense,  (iii) all reserves carried and
not deducted from assets, (iv) treasury stock and capital stock,  obligations or
other securities of, or capital  contributions to or investments in, any Related
Person,  (v) securities  which are not readily  marketable,  (vi) cash held in a
sinking or other  analogous  fund  established  for the  purpose of  redemption,
retirement or  prepayment  of capital  stock or Debt,  (vii) any write-up in the
book value of any asset  resulting  from a revaluation  thereof,  and (viii) any
items not  included  in clauses  (i)  through  (vii)  above which are treated as
intangibles in conformity with GAAP.

          "Inventory"  means all inventory (as defined in the Code) of Borrower,
including  without  limitation  all personal  property  held for sale,  lease or
demonstration,  or to be furnished  under  contracts of sale or service,  in all
forms, wherever located, now or hereafter existing, including (i) all inventory,
raw materials,  work in process,  finished goods, materials and supplies used or
to be consumed in Borrower's business,  and all additions and accessions to such
property,  (ii) goods in which  Borrower  has an  interest in mass or a joint or
other  interest or right of any kind,  and (iii) goods which are  returned to or
repossessed by Borrower, and all accessions thereto and products thereof.

          "issuances" is defined in Section 10.04I hereof.

          "Letter  Ruling"  means a  letter  ruling  from the  Internal  Revenue
Service  setting  forth  the  specific  terms of the  proposed  transaction  and
confirming  to  the  satisfaction  of  Lender,   among  other  things,  (a)  the
availability  and  calculation of the credit  available  under Section 29 of the
Internal  Revenue  Code of 1986,  as  amended  (the "1986  Code"),  (b) that the
construction  contract for the Alabama Project satisfies the requirements of the
Section  29 of the 1986  Code,  and (c) that the  allocation  of the  Section 29
Credits to the various members of the buyer is valid under the 1986 Code.

          "Lien" means any mortgage,  pledge, lien, claim, charge,  encumbrance,
security interest, conditional sale or title retention  agreement, easement, use



                                        7
<PAGE>

restriction,  covenant  or  reservation  against  or  with  respect  to  any  of
Borrower's property or interest in property.

          "Loan  Documents"  means  this  Agreement,   the  Note,  the  Security
Documents,  and any and all other documents executed pursuant hereto or thereto,
or contemplated hereby or thereby (other than the Purchase Agreement Documents),
as the same may be modified, extended, renewed, amended or replaced from time to
time.

          "Material Adverse Change" means any material and adverse change in (a)
Borrower's  business,   properties,   condition  (financial  or  otherwise),  or
operations  or  results  thereof  since  the date of the most  recent  financial
statement  given to Lender with respect to Borrower,  (b) Borrower's  ability to
pay and perform the Obligations,  with respect to the development,  construction
or operation of the Alabama Project or (d) the Collateral, Lender's Liens on the
Collateral  or the  priority  of  Lender's  Liens on a  material  portion of the
Collateral.

          "Note"  means  the  promissory  note of or about  even  date  herewith
executed by Borrower in the principal  amount of the Term Loan, in substantially
the form  attached  hereto  as  Exhibit  l.01.TN,  as the  same may be  amended,
modified, renewed, extended, or replaced from time to time.

          "Obligations"  means any and all indebtedness and other obligations of
Borrower to Lender,  both  monetary  and  non-monetary,  whether now existing or
hereafter  arising  and  however  acquired,   and  whether  arising  under  this
Agreement, the Note, the other Transaction Documents or otherwise.

          "Other Taxes" is defined in Section 2.04.B hereof.

          "Permitted Liens" means:

               (i) Liens (but only to the extent not yet delinquent or (a) which
are being  contested  in good faith by  appropriate  proceedings  with  reserves
acceptable to Lender having been set aside and  maintained  and (b) with respect
to tax  liens  on the  Collateral,  as to which  Borrower  shall  have  paid the
undisputed  amount)  securing  taxes,  assessments  or  governmental  charges or
levies,  or arising  in  connection  with  workers'  compensation,  unemployment
insurance or social security  obligations,  or securing the claims or demands of
materialmen,  mechanics,  carriers,  warehousemen,   landlords  and  other  like
Persons;

               (ii) Attachment,  judgment or similar liens arising in connection
with court  proceedings (a) which are discharged or stayed pending appeal within
thirty (30) days of attachment or levy, and, if so stayed, the stay


                                       8
<PAGE>



remains in effect or (b)  payment of which is covered in full  (subject  only to
customary and reasonable deductibles) by insurance or surety bonds;

               (iii) Liens in favor of Lender under the Loan Documents;

               (iv) Existing Liens disclosed on Schedule 1.01.PL attached hereto
and  Liens   affecting  real  property   interests   consisting  of  (a)  zoning
regulations, (b) easements, (c) set-back lines, or (d) covenants,  conditions or
restrictions,  now existing or hereafter arising,  which do not in the aggregate
have a material  adverse  effect on  Borrower's  use and  enjoyment of such real
property interests; and

               (v) The rights of Alabama Synfuel #1, Ltd. in the Alabama Project
specifically set forth in Schedule 1.01.PL.


          "Person"  means any natural  person,  corporation,  limited  liability
company,  partnership,  sole  proprietorship,   firm,  association,  government,
governmental  agency  or any other  entity,  whether  acting  in an  individual,
fiduciary or other capacity.

          "Port  Hodder Site" means the 15 acre leased  parcel  operated by Port
Hodder,  Inc., located in the City of Birmingham,  Alabama,  fronting the Locust
Fork of the Black  Warrior  River at river  mile 399.0 and  located at  latitude
33.5876 and longitude 87.1048.

          "Proceeds"  shall have the meaning  given to that term in the Code and
shall include whatever is received upon the sale, exchange,  collection or other
disposition of Collateral.

          "Purchase  Agreement  Documents"  means the Alabama  Project  Purchase
Agreement,  and  any and all  other  documents  executed  pursuant  thereto,  or
contemplated  thereby  (other  than  the  Loan  Documents),  as the  same may be
modified, extended, renewed, amended or replaced from time to time.

          "Receiver"  means any  trustee,  receiver,  custodian,  fiscal  agent,
liquidator or similar officer.

          "Related  Person" means (i) any  shareholder who owns or controls more
than five percent (5%) of the voting securities of Borrower, (ii) any officer or
director of Borrower, (iii) any other Person that, directly or indirectly,



                                        9
<PAGE>

controls,  is controlled by or is under common control with or is related to, by
blood or marriage, Borrower or any Person identified in clauses (i) or (ii), and
(iv) any member of the Employee Group and any Person who is related, by blood or
marriage, to any member of the Employee Group.

          "Responsible  Officer"  means  each of the Chief  Executive  Officers,
President,  each Vice President,  the Treasurer, the Chief Financial Officer and
the  Chief  Accounting  Officer  of  Borrower,  or any other  Person,  howsoever
designated, performing substantially similar roles for Borrower.

          "SEC Filings"  means: Borrower's  Registration  Statement on Form 10/A
Amendment No. 2; and  Borrower's  Annual Report on Form 10-K for the fiscal year
ended  September 30, 1996, and any  subsequent  filing made by Borrower with the
Securities and Exchange Commissioner.

          "Security Documents" means this Agreement,  the Collateral  Assignment
of Lease, the Construction  Assignment Agreement and any financing statements or
other  documents  or  agreements  reasonably  requested  by Lender to secure the
Obligations hereunder.

          "Shares" is defined in Section 10.01.A hereof.

          "Taxes" is defined in Section 2.04.A hereof.

          "Termination Date" means the first anniversary of the date hereof.

          "Term Loans" is defined in Section 2.01.A.

          "Transaction Documents" means  this  Agreement, the Loan Documents and
the Purchase Agreement Documents.

     SECTION 1.02.  Accounting Terms. Any accounting term used in this Agreement
which is not  specifically  defined  herein  shall have the meaning  customarily
given to it under GAAP as consistently applied by Borrower as promulgated in (i)
the  documents of Rule 203 of the Code of  Professional  Conduct of the American
Institute  of  Certified  Public  Accountants,   (ii)  Statement  of  Accounting
Standards  No. 43 "Omnibus  Statement  on Auditing  Standards"  of the  Auditing
Standards Board of the American  Institute of Certified  Public  Accountants and
(iii)  any  superseding  or  supplemental   documentation   of  equal  authority
promulgating  generally accepted accounting principles and practices,  all as in
effect from time to time.

     SECTION  1.03.  Other Terms.  All other terms  contained in this  Agreement
which are not defined herein shall, unless the context indicates otherwise, have
the  meanings  provided  for by the Code to the extent  such  terms are  defined
therein.

                                       10
<PAGE>


                                   ARTICLE II
                                THE INDEBTEDNESS

     SECTION 2.01. The Commitment and the Term Loans; the Note.

          A. Subject to the terms and conditions hereof, during the period up to
but not including  September 30, 1997 (the  "Commitment  Period"),  Lender shall
make loans to the  Borrower in such  amounts as  Borrower  may from time to time
request  ("Term Loans") but not exceeding in aggregate  principal  amount at any
one time outstanding  $5,000,000 (the "Commitment");  provided,  however,  that,
prior to obtaining a satisfactory  Letter Ruling,  Lender shall not be obligated
to make  Term  Loans  in an  aggregate  amount  exceeding  $1,900,000  provided,
further,  that any amounts drawn under any letters of credit  arranged by Lender
or any or its  Affiliates  for the purposes  described  in Section  2.01.B below
shall be deemed "Term Loans" for the purposes of this Section  2.01.A;  provided
further; that any payments with respect to the Construction Contract (as defined
in the Alabama Project  Purchase  Agreement) shall be paid directly by Lender to
the Contractor and shall be deemed "Term Loans" for the purposes of this Section
2.01.A.

          B. The Term Loans shall be available in the following  amounts and for
the following  purposes:  (i) up to $25,000 to repay the Demand Promissory Note,
dated as of  February  24,  1997,  of  Borrower  in favor of Lender,  (ii) up to
$100,000  to be used as a "good  faith"  deposit  pursuant  to the  Amended  and
Restated Supply Agreement,  dated as of the date hereof,  (iii) up to $3,200,000
to  complete  construction  by  Borrower  of the  Alabama  Project,  (iv)  up to
$1,640,000 to finance the acquisition by Borrower for the benefit of the Alabama
Project of up to 60,000 tons of coal fines to be stored at the Port Hodder Site,
and (v) up to an amount equal to  $5,000,000  minus such amounts as are borrowed
pursuant to clauses (i) and (iv) above, to fund the net working capital needs of
the  plant  operations  of the  Alabama  Project;  provided,  however,  that the
determination  of the amount of such net working  capital needs shall be subject
to the approval of Lender in its sole discretion;  provided,  further,  that any
amounts  available to be drawn under any letters of credit arranged by Lender or
any of its  Affiliates  for the purposes  described in this Section 2.01.B shall
not be available to be drawn as Term Loans hereunder.


                                       11
<PAGE>

          C. Term  Loans  shall be made upon the  written  request  of  Borrower
against invoices for the purposes  contemplated in paragraph B above;  provided,
however,  except in connection  with Term Loans pursuant to clauses (i) and (ii)
of Section  2.01.B  above,  the Lender shall have no obligation to make any Term
Loan hereunder  until  completion of each of the following:  (i) delivery of the
opinions  of counsel of Ballard  Spahr  Andrews & Ingersoll  and Lange,  Simpson
Robinson & Somerville,  in  substantially  the forms attached  hereto as Exhibit
5.01.R, (ii) execution and delivery of a Lease and Lease Option between Borrower
and Parker Towing Company,  Inc., in form and substance reasonably  satisfactory
to Lender,  (iii)  delivery  of a  certificate  of an  executive  officer of the
Borrower  certifying that (a) the representations and warranties of the Borrower
and Alabama  Synfuel #1 Ltd. in each of the  Transaction  Documents are true and
complete  on  and  as  of  the  date  of  such   certification  as  though  such
representations  and  warranties  were  made  on  and  as of the  date  of  such
certificate,  and  (b)  each of  Borrower  and  Alabama  Synfuel  #1 Ltd.  is in
compliance with the terms of each of the  Transaction  Documents and no event of
default has occurred under any of the  Transaction  Documents,  (iv) delivery to
Lender of evidence of the release of the lien of AJG Financial Services, Inc. on
the apron drying oven being  manufactured  by National  Dryer Company for use in
the Alabama project, (v) execution and delivery of any Transaction Documents not
previously delivered to Lender,  including the Security Documents,  (vi) receipt
of  confirmation  of  filing  of  the  Security   Documents  in  the  respective
jurisdictions  identified  by Lender,  and (vii)  delivery of a  certificate  of
insurance by Borrower in form and substance reasonably satisfactory to Lender.

          D.  Subject  to  Section  10.01  hereof,  at  any  time  prior  to the
termination of the Commitment  Period, by written notice to Lender no later than
11:00 A.M. Portland, Oregon time sixty (60) days prior to such termination (such
period  from  and  after  notice  to the  termination,  the  "Early  Termination
Period"),  Borrower may permanently terminate the Commitment.  Such notice shall
be in writing or by  telephonic  communication  confirmed  by  telecopy or other
facsimile transmission on the same day as such notice.

          E. Lender may terminate  the  Commitment to make further Term Loans at
any time Lender  determines (in the case of clause (ii), in its sole discretion,
and in the case of each of clause (i), in its reasonable  discretion) that (i) a
favorable  Letter  Ruling will not be obtained,  or (ii) an Event of Default has
occurred and is continuing under any of the Transaction Documents.


                                       12
<PAGE>

          F. In the  event  that no Term  Loans  have  been  made  prior  to the
termination  of  the  Commitment  Period  (and  no  simultaneous   advances  and
conversions  contemplated  under  Article X hereof shall have been made prior to
such time),  this Agreement shall  automatically  terminate as of the end of the
Commitment Period.

     SECTION 2.02. Repayment.

          A.  Obligation to Repay.  Subject to Section  10.01  hereof,  Borrower
shall  repay the  principal  amount of the Term  Loan,  together  with  interest
thereon,  in accordance  with the terms of this  Agreement and the Note.  Except
where the time for  payment  has been set forth in this  Section  2.02 or in the
Note, Borrower shall pay all Obligations to Lender immediately upon demand.

          B. Repayment of Protective Advances.  Notwithstanding  anything to the
contrary contained in this Agreement or the other Transaction  Documents,  until
those amounts  which from time to time shall be payable by Borrower  pursuant to
the provisions of Section 7.02 hereof  ("Protective  Advances")  shall have been
paid in full, any and all sums (i) paid by Borrower to Lender, or (ii) otherwise
received  by Lender  for  application  to payment of any  Obligations,  may,  at
Lender's option,  be applied (in lieu of any other  application  thereof) to pay
Protective Advances.

          C. Prepayments.

               (i) Optional  Prepayments.  Subject to Section 10.01  hereof,  by
written notice to Lender no later than 11:00 A.M.  Portland,  Oregon time, sixty
(60) days prior to such  prepayment,  Borrower  may prepay,  at any time without
premium or penalty, all Obligations outstanding under the Note.

               (ii) Termination of Commitment.  Subject to Section 10.01 hereof,
prepayment   under  this  Section  2.02.C  shall  cause  the  Commitment  to  be
immediately and automatically terminated.

     SECTION 2.03. Payments and Computations.

          A. Borrower  shall make each payment  hereunder and under the Note not
later  than  12:30  p.m.  (Portland,  Oregon  time)  on the day when due in U.S.
Dollars to Lender at the address for  payments  set forth in Section 8.06 hereof
in same day  funds,  and any funds  received  after that hour shall be deemed to
have been received by Lender on the next succeeding  Business Day.  Whenever any
payment hereunder or under the Note shall be  stated to be due on a day which is



                                       13
<PAGE>

not a Business Day, such payment shall be made on the next  succeeding  Business
Day,  and  such  extension  of time  shall  in  such  case  be  included  in the
computation of payment of interest or fees, as the case may be.

          B. Lender shall record in its records,  or at its option on a schedule
attached to the Note,  the date and amount of each  repayment  of the Term Loan.
The  aggregate  unpaid  principal  amount so  recorded  shall be  presumed to be
correct and binding on Borrower absent manifest error.  The failure to so record
any such  amount,  or any error in so  recording  any such  amount,  shall  not,
however, limit or otherwise affect Borrower's obligations hereunder or under the
Note to repay the principal amount of the Term Loan,  together with all interest
accruing thereon.

     SECTION 2.04. Taxes.

          A. Any and all payments by Borrower  hereunder or under the Note shall
be made,  free and clear of and  without  deduction  for any and all  present or
future taxes,  levies,  imposts,  deductions,  charges or withholdings,  and all
liabilities, penalties and interest with respect thereto, excluding, in the case
of Lender,  (x) withholding  taxes that are creditable  against taxes payable by
Lender,  (y) periodic taxes upon or with respect to the value of the interest of
Lender in the Note or this  Agreement,  and (z) taxes  imposed on or measured by
Lender's  income or receipts and franchise and doing  business  taxes imposed on
Lender  (all such  nonexcluded  taxes,  levies,  imposts,  deductions,  charges,
withholdings,  liabilities, penalties and interest being hereinafter referred to
as "Taxes"). If Borrower shall be required by law to deduct any Taxes from or in
respect of any sum payable  hereunder  or under the Note to Lender,  (i) the sum
payable shall be increased as may be necessary so that after making all required
deductions Lender receives an amount equal to the sum it would have received had
no such deductions been made, (ii) Borrower shall make such deductions and (iii)
Borrower shall pay the full amount deducted to the relevant  taxation  authority
or other authority in accordance with applicable law.

          B. In addition,  Borrower agrees to pay any present or future stamp or
documentary  taxes or any other  excise or  property  taxes,  charges or similar
levies which arise from any payment made under any of the Transaction  Documents
or from the execution,  delivery or  registration  of, or otherwise with respect
to, any of the  Transaction  Documents,  excluding,  in the case of Lender,  (x)
taxes,  charges  and  similar  levies  imposed  as a result  of a  voluntary  or
involuntary  transfer  or  other  disposition  of  all  or  any  portion  of its
respective equitable or legal interests in the Note or this Agreement and (y)



                                       14
<PAGE>

taxes  imposed on or measured by its income or receipts and  franchise and doing
business taxes imposed on it (all such  non-excluded  taxes,  charges and levies
being hereinafter referred to as "Other Taxes").

          C. Borrower shall,  within thirty (30) days from the date Lender makes
written demand therefor,  indemnify Lender for the full amount of Taxes or Other
Taxes to the extent  such taxes are either due and  payable or have been paid by
Lender.

          D.  Within  thirty  (30) days after the date of any  payment of Taxes,
Borrower  will furnish to Lender the  original or a certified  copy of a receipt
evidencing payment thereof.

          E. The  provisions  of  Sections  2.04.A  and 2.04.B  hereof shall not
extend to any of the following:

               (i)  Taxes or Other  Taxes  imposed  on  Lender  as a result of a
voluntary or  involuntary  transfer or  disposition of all or any portion of its
equitable or legal interest in the Note or this Agreement;

               (ii) Taxes or Other  Taxes  imposed on Lender to the extent  such
Taxes or Other Taxes result from the failure of Lender to accurately prepare and
file timely and properly any return or form, certificate or other document; or

               (iii) Taxes or Other Taxes imposed on Lender by any  jurisdiction
as a result of  activities  or presence in such  jurisdiction  unrelated  to the
transactions contemplated by this Agreement and agreements contemplated hereby.

          F. In the event that  Lender  transfers  or assigns any of its rights,
interest or obligations under the Note or this Agreement, Borrower's obligations
under  this  Section  2.04  shall in no case  exceed  the  amount of  Borrower's
obligations  had said rights,  interest or obligations  not been  transferred or
assigned.

     SECTION  2.05.  Late  Payments.  If any sums owing by  Borrower  to Lender,
whether principal,  interest or otherwise, are not paid on the due date (whether
as a result of scheduled maturity,  acceleration or demand), after giving effect
to any  applicable  grace period,  then (i) Borrower  shall pay to Lender a late
charge  equal to five  percent  (5%) of such sum(s) and (ii) the  interest  rate
payable  under the Note shall be  increased to the Default  Interest  Rate until
such unpaid  sum(s) are paid to Lender.  Borrower  acknowledges  that the actual
expenses  incurred by Lender in attending  to late  payments and the cost of the
loss of use of funds are difficult to  ascertain, and agree that the late charge



                                       15
<PAGE>

and the increase in the rate of interest as set forth above together  constitute
a reasonable  estimate of these additional losses,  expenses and costs to Lender
resulting from such late payments.


                                   ARTICLE III


                           ACKNOWLEDGMENT AND CREATION
                              OF SECURITY INTEREST

     SECTION 3.01.  Acknowledgment and Creation of Security Interest.  To secure
payment and performance of the Obligations,  Borrower hereby assigns,  transfers
and grants to Lender a continuing first priority  security  interest in and lien
on all of the Collateral (subject only to the Permitted Liens). Borrower further
acknowledges  and agrees that the Obligations are secured by security  interests
in and liens upon all of the  Collateral in accordance  with the  provisions set
forth herein and in the other Loan Documents.

     SECTION 3.02. Duty of Care.  Lender shall have no duty of care with respect
to the  Collateral,  except  that Lender  shall  exercise  reasonable  care with
respect  to the  Collateral  in  Lender's  custody,  but shall be deemed to have
exercised  reasonable care if such property is accorded treatment  substantially
equal to that which  Lender  accords its own  property,  or if Lender takes such
action with  respect to the  Collateral  as Borrower  shall  request in writing,
provided, that no failure to comply with any such request nor any omission to do
any such act  requested  by  Borrower  shall be  deemed a  failure  to  exercise
reasonable  care.  Lender's failure to take steps to preserve rights against any
parties or property  shall not be deemed to be a failure to exercise  reasonable
care with respect to the Collateral in Lender's custody.

     SECTION 3.03. Release of Liens and Security Interests.

          A.  Except as  expressly  required by the terms of this  Agreement  or
applicable  law, Lender shall not be obligated to release its liens and security
interests in any portion of the  Collateral  so long as any  Obligations  remain
outstanding;  provided,  however,  that any  release  by Lender of its liens and
security  interests in any portion of the Collateral shall apply only to such of
the Collateral as is  specifically  described in the release given by Lender and
shall not in any way  constitute  a release by Lender of its liens and  security
interests  in the  Proceeds,  products  or  accessions  of  such  Collateral  in
existence at the time of such release or of any other Collateral.

          B. So  long  as  no  Default  or  Event of Default has occurred and is
continuing or would, as a result of or after giving  effect  to the sale,  exist



                                       16
<PAGE>


or be continuing,  (i) Borrower may, in the ordinary course of business, sell to
third parties  synthetic coal  products;  and (ii) Borrower may, in the ordinary
course of business,  sell or otherwise  dispose of obsolete or excess  Equipment
used or useful in connection  with the Alabama Project of an aggregate value not
exceeding Five Thousand Dollars  ($5,000) during the term of hereof,  and Lender
shall, if requested by Borrower,  release its security interest in and Lien upon
such Equipment.

          C.  Lender  shall  release  its liens  and  security  interest  in the
Collateral upon the first of the following to occur:  (i) the termination of the
Commitments  and the  satisfaction  in full of all  Obligations  under  the Loan
Documents;  (ii) the closing of the purchase by Birmingham Syn Fuel,  L.L.C.  of
the Alabama Project pursuant to the Alabama Project Purchase Agreement, or (iii)
the conversion of all of the outstanding  Term Loans and Commitments into Shares
pursuant to Article X hereof.

     SECTION 3.04. Continuation of Liens and Security Interests. All of Lender's
rights with respect to the liens and security interests  hereunder and under the
other Security  Documents shall continue  unimpaired,  and Borrower shall be and
remain   obligated   in   accordance   with  the  terms   hereof  and   thereof,
notwithstanding the release or substitution of any Collateral at any time(s), or
of any rights or interests therein,  or any delay,  extension of time,  renewal,
compromise,  accommodation or other indulgence granted by Lender with respect to
Borrower,  any other Person or any of the  Obligations,  or any promissory note,
draft, bill of exchange or other instrument given in connection therewith.

     SECTION  3.05.  Insurance  Proceeds.  Proceeds  of  any  insurance  on  the
Collateral  shall be paid  directly  to Lender  pursuant  to the  Lender's  loss
payable endorsement to Borrower's  casualty insurance policies.  Lender may deal
directly with the insurance company to adjust or settle the loss: So long as (i)
no Default or Event of Default  has  occurred  and is  continuing;  and (ii) the
proceeds from  insurance and, if needed,  additional  funds provided by Borrower
are, in the reasonable judgment of Lender, sufficient,  Borrower may require the
proceeds be used to rebuild, repair or replace any damaged Collateral.  Borrower
shall obtain the prior written  consent of Lender to the method of such rebuild,
repair and/or replacement,  including, if necessary,  approval to any changes to
the  plans  and  specifications  approved  under the  Alabama  Project  Purchase
Agreement,  which  approval  shall  not  be  unreasonably withheld. Lender shall



                                       17
<PAGE>

respond to any  written  request  for  approval  from  Borrower  within ten (10)
BusinessDays  of receipt  thereof,  indicating  approval  or  setting  forth the
reasons for disapproval, as applicable.


                                   ARTICLE IV

                         REPRESENTATIONS AND WARRANTIES

     Subject to the specific exceptions set forth in the Schedules referenced in
this Article IV, Borrower makes the following  representations and warranties to
Lender, which representations and warranties shall survive the execution of this
Agreement  and remain in full force and effect until  Borrower has satisfied and
discharged all Obligations  under the Loan Documents.  The  representations  and
warranties  shall be deemed  repeated  as of the date of each  advance of a Term
Loan; provided,  however, that from and after the closing of the transfer of the
Alabama  Project  pursuant  to  the  Alabama  Project  Purchase  Agreement,  the
representations and warranties contained in Sections 4.07, 4.08 (in so far as it
relates to Collateral) and 4.19-4.22 shall not be brought down.

     SECTION 4.01.  Corporation in Good  Standing.  Borrower has complied in all
material  respects with all laws  necessary to conduct its business as presently
conducted and Borrower is a corporation (i) duly organized, validly existing and
in good standing in Delaware, (ii) in good standing and qualified to do business
in the jurisdiction where such Borrower's principal place of business is located
and  (iii)  in  good  standing  and  qualified  to  do  business  in  all  other
jurisdictions  to the extent  necessary  for Borrower to conduct its business as
presently conducted in such jurisdictions.

     SECTION  4.02.  Due  Authorization.  Borrower  has the  authority,  and has
completed all proceedings and obtained all approvals and consents necessary,  to
execute,  deliver and perform this Agreement and the  transactions  contemplated
hereby.  Such  execution,  delivery  and  performance  will  not  contravene  or
constitute  a default  under or result in or  require  the  creation  of a lien,
security  interest,  or other charge or encumbrance  upon any assets of Borrower
(except the liens created by this Agreement or the other Loan Documents in favor
of Lender) pursuant to any applicable law or regulation, any charter document of
Borrower,  or  any  contract,  agreement,  judgment,  order,  decree,  or  other
instrument binding upon or affecting Borrower.

     SECTION 4.03. Pending and Threatened  Actions.  There is no action, suit or
proceeding  pending or, to the best of Borrower's  knowledge  after due inquiry,
threatened  against  Borrower  where an adverse  result  could  cause a Material
Adverse Change, other than as set forth on Schedule 4.03 hereto.


                                       18
<PAGE>

     SECTION 4.04.  Disclosure.  No written statement made by Borrower to Lender
in connection  with this Agreement  contains any untrue  statement of a material
fact or omits a material fact necessary to make such statement accurate.

     SECTION 4.05.  Valid and  Binding  Obligations.  All  of   the  Transaction
Documents are valid and binding  obligations of Borrower,  fully  enforceable in
accordance with their respective terms.

     SECTION  4.06.  Payment of Taxes.  All tax  returns and reports of Borrower
required to be filed have been timely filed, and all taxes,  assessments,  fees,
interest,  penalties  and  other  governmental  charges  upon  Borrower  and its
properties,  assets,  income and franchises  which are due and payable have been
paid when due and payable except where such taxes, assessments,  fees, interest,
penalties  or other  governmental  charges are being  contested in good faith by
appropriate  proceedings  promptly instituted and diligently conducted and where
reserves or other appropriate provisions, if any, as required in accordance with
GAAP, have been made and are being maintained therefor.

     SECTION  4.07.  Title  to  Collateral  and  Liens.  Borrower  has  good and
marketable  title to all of the Collateral and, except for the Permitted  Liens,
all of the Collateral is free of any and all liens, charges, security interests,
encumbrances and adverse claims.

     SECTION  4.08.  Defaults.  There are (i) no  defaults in the payment of any
Debt  (other  than  defaults  with  respect to trade  payables  incurred  in the
ordinary course of business,  the occurrence of which could not cause a Material
Adverse  Change) or, (ii) no defaults  in the  performance  of any  obligations,
including   obligations  to  deliver  synthetic  coal  product  under  long-term
contracts or with respect to Debt secured by any of the Permitted  Liens against
the Collateral  which are or may be senior to any lien thereon or other security
interest therein in favor of Lender,  by assignment or otherwise,  which, in the
case of any event under this clause (ii), could cause a Material Adverse Change.

     SECTION 4.09. Permits.  Borrower possesses, and will hereafter possess, all
material  permits,  memberships,  franchises,  contracts,  patents and  licenses
required,  and  fictitious  name rights  necessary,  to enable it to conduct the
business in which it is now engaged in each jurisdiction  where such business is
now being conducted.

     SECTION 4.10.  Principal  Place  of  Business;  Jurisdictions  Where  Doing
Business; Fiscal Year. Borrower's principal place of business, the offices where



                                       19
<PAGE>


Borrower  keeps its records and the states where  Collateral  is located are set
forth on Schedule 4.10 attached hereto. The end of the Borrower's fiscal year is
September 30.

     SECTION 4.11. ERISA. Borrower does not maintain any ERISA Plan.

     SECTION 4.12.  Subordination.  None of the Obligations are  subordinated in
right of payment to any  obligations of Borrower to any other Person,  including
any Debt of  Borrower to any  Related  Persons.  Except as set forth on Schedule
4.12  attached  hereto,   Borrower  is  not  currently  indebted,   directly  or
indirectly, to any Related Persons.

     SECTION 4.13.  Government  Approval.  No authorization or approval or other
action  by,  and no notice to or filing  with,  any  governmental  authority  or
regulatory  body is required for the due execution,  delivery and performance by
Borrower of any of the Transaction Documents.

     SECTION  4.14.  Securities  and Exchange  Act;  Investment  Company Act. No
proceeds  of the Term  Loan  have  been  used to  acquire  any  security  in any
transaction  which is subject to Sections 13 and 14 of the  Securities  Exchange
Act of 1934. Borrower is not an "investment  company" or a company  "controlled"
by an "investment  company" within the meaning of the Investment  Company Act of
1940, as amended.

     SECTION  4.15.  Regulation  U.  Borrower is not engaged in the  business of
extending  credit for the purpose of purchasing or carrying margin stock (within
the  meaning of  Regulation  U issued by the Board of  Governors  of the Federal
Reserve  System),  and no proceeds of the Term Loan have been or will be used to
purchase or carry any margin  stock,  to extend credit to others for the purpose
of  purchasing  or  carrying  any margin  stock,  or for any other  purpose  not
permitted by Regulations G, U, V or X of the Federal Reserve Board.

     SECTION  4.16.  Strikes Etc.  Neither the business  nor the  properties  of
Borrower  currently  are  affected  by any fire,  explosion,  accident,  strike,
lockout or other labor dispute,  drought, storm, hail, earthquake,  embargo, act
of God or other  casualty  (whether  or not  covered by  insurance),  materially
adversely affecting such business or properties or the operations of Borrower.

     SECTION 4.17. Adverse Agreements.  Borrower  is not party to any indenture,
loan or credit agreement or lease or other agreement or instrument or subject to
any charter or  corporation  restriction  which,  if  performance  or compliance


                                       20
<PAGE>

therewith  is effected for its intended  purpose by the parties  thereto,  would
cause a Material  Adverse  Change in Borrower's  business,  properties,  assets,
operations or condition,  financial or otherwise,  or on the ability of Borrower
to carry out its obligations under any of the Transaction Documents.

     SECTION 4.18. Trade Names and Intellectual Property. Schedule 4.18 attached
hereto  contains a complete list of all of Borrower's  trade names,  trademarks,
trademark applications,  patents, patent applications,  copyrights and copyright
applications included in the Collateral,  and Borrower is not operating or doing
business under any other trade name or utilizing any other  trademarks,  patents
or copyrights in the conduct of the Alabama Project.

     SECTION 4.19. Location of Collateral. All of the items, whether tangible or
intangible,  comprising  the  Collateral  are  located at the  places  specified
(detailing account numbers and other information  sufficient to permit Lender to
readily locate and identify the Collateral) in Schedule 4.19 attached hereto.

     SECTION 4.20.  Possession of Collateral.  Borrower has exclusive possession
and  control of the  Collateral,  except  where (i) Lender is in  possession  or
control of the  Collateral  pursuant  to the terms of this  Agreement,  and (ii)
another  Person is in  possession  and control of the  Collateral  to the extent
necessary to give effect to the Permitted Liens.

     SECTION 4.21. Validity and Priority of Security Interests.  Except  where a
Permitted  Lien is senior in  priority  to  Lender's  security  interest  in the
Collateral,  this Agreement  creates a valid first priority security interest in
the Collateral

     SECTION 4.22. Accounts. Unless otherwise disclosed by Borrower to Lender in
writing, each Account listed or referred to on any trial balance,  balance sheet
or the books and records of Borrower, or referred to in any report to Lender, is
and will be free and clear of Liens in favor of any Person  other  than  Lender,
will cover a bona fide sale or lease and delivery of goods usually dealt with by
Borrower  in the  ordinary  course  of  Borrower's  business  or will  cover the
rendition of services by Borrower to customers of a kind ordinarily  rendered in
the ordinary course of Borrower's business,  and will be for a liquidated amount
from a  customer  competent  to  contract  therefor  and  maturing  as stated by
Borrower.

     SECTION 4.23  Agreements  with  Related  Persons.  There are no  contracts,
licenses, agreements,  arrangements or limitations on the use by Borrower of any
property, tangible or intangible, or assets used or utilizable in the business



                                       21
<PAGE>

of Borrower  with any Related  Person other than as  disclosed on Schedule  4.23
attached hereto.


                                    ARTICLE V
                              COVENANTS OF BORROWER

     SECTION 5.01.  Affirmative  Covenants.  Until  Borrower  has  satisfied and
discharged all Obligations  under the Loan Documents,  subject to the provisions
of Section 8.01 hereof, Borrower will:

          A. Performance of Obligations. Punctually pay and perform  each of the
Obligations in accordance with the terms of the Transaction Documents.

          B. Financial Statements and Reports. Furnish Lender:

               (i) not later than one  hundred  (120) days after the end of each
fiscal year of Borrower,  consolidated financial statements prepared by Borrower
in accordance with GAAP and audited by independent  certified public accountants
as of and for  the  fiscal  year  then  ended,  certified  by  such  independent
certified  public  accountants in a manner  reasonably  acceptable to Lender and
including a balance sheet, a statement of operations, a statement of cash flows,
a  statement  of  stockholders'  equity,  in  each  case,  consistent  with  the
Securities  Exchange Act of 1934, as amended,  and the rules and  regulations of
the Securities and Exchange Commission;

               (ii) not later  than  forty-five  (45) days after the end of each
fiscal  quarter of Borrower  (other than the fiscal  quarter which is Borrower's
fiscal  year end),  consolidated  financial  statements  prepared by Borrower in
accordance  with GAAP as of and for the quarter then ended, to include a balance
sheet, a statement of operations,  and a statement of cash flows,  in each case,
consistent with the Securities  Exchange Act of 1934, as amended,  and the rules
and regulations of the Securities and Exchange Commission;

               (iii) promptly  (in  any  event within five (5) Business Days), a
copy of any monthly management reports;

               (iv) at the time of delivery of the financial statements referred
to in Sections 5.01.B(i), and (ii)hereof, a letter addressed to Lender signed by
the Chief Executive  Officer,  Chief Financial  Officer or the Chief  Accounting
Officer of Borrower, certifying that no condition, act or event has occurred and
is  continuing  which  constitutes  a  Default or an Event of Default under this
Agreement;


                                       22
<PAGE>

               (v) not later than ten (10) Business Days after Lender's  request
therefor,  copies of all annual federal and state tax returns for taxes based on
Borrower's  income,  all exhibits and schedules  thereto and any  additional tax
returns  (whether  for income or any other taxes and  whether  filed with state,
federal or other taxing authorities), exhibits and schedules of Borrower;

               (vii) at such times and from time to time as Lender  may  request
of  Borrower,  such  other  reports  concerning  the  Collateral  or  Borrower's
operations as Lender may reasonably request;

               (viii) within five (5) days after the filing thereof,  all forms,
statements, reports, notices or other filings filed or made by Borrower with the
Securities and Exchange Commission; and

               (ix)  promptly upon receipt,  copies of all  management  letters,
internal control  evaluations and reports and other material letters,  memoranda
or reports submitted by Borrower's  independent  certified public accountants or
consultants  with  respect  to  any  matter  concerning  the  audits,  financial
statement presentation or other accounting matters.

          C. Accounting Records. Maintain adequate books and accounts and permit
any representative of Lender,  during normal business hours, to inspect,  audit,
copy and examine such books and accounts and inspect the  properties of Borrower
and to interview Borrower's independent  accountants regarding operating results
and financial condition.

          D. Collateral Records. Keep accurate and complete records of Accounts,
allow Lender or any of Lender's agents,  including  consultants hired by Lender,
to call at any of Borrower's places of business (a) prior to the occurrence of a
Default or an Event of Default,  on at least one Business  Day's advance  notice
and (b) after the occurrence of a Default or an Event of Default,  without prior
appointment,  at intervals  determined by Lender (without hindrance or delay) to
inspect the Collateral and to inspect, examine, check and make extracts from the
books,  records,  journals,  order receipts,  correspondence  and any other data
relating  to  the  Collateral  or  operations  of  the  Alabama  Project  or any
transactions (y) between Borrower and Lender,  or (z) affecting  Lender's rights
under this Agreement,  the expenses of which shall be borne by Borrower.  If any
such records are held by a third party,  Borrower  hereby  authorizes  Lender to
contact  such third party and direct such third party to provide  access to such
documents to Lender as if such documents were in Borrower's  possession.  Lender



                                       23
<PAGE>

may  retain  one or more  consultants  in  connection  with the  foregoing,  the
expenses of which shall be borne by Borrower. Borrower further agrees to provide
Lender  with such  information  as Lender  may from  time to time  request  with
respect to the location of any of the  Collateral.  In addition,  Borrower shall
notify  Lender  promptly in writing of any  change(s)  in location of any office
where records concerning any of the Accounts are maintained, of any change(s) in
location of  Borrower's  places of business and of any change(s) in the location
of any of the Collateral.

          E. Additional  Information;  Board of  Director Meetings. Provide such
additional information regarding the business affairs and financial condition of
Borrower  as Lender may from time to time  request,  and provide  Lender  prompt
notice  of,  and  admittance  to,  all  meetings  of the Board of  Directors  of
Borrower.

          F. Maintenance of Property.  Keep all of Borrower's  properties useful
or necessary to  Borrower's  business in good repair and  condition,  reasonable
wear and tear excepted,  and from time to time make necessary repairs,  renewals
and  replacements  thereto so that such property shall be fully and  efficiently
preserved  and  maintained,  except to the  extent it would not cause a Material
Adverse Change.

          G. Maintenance of Business. Preserve and maintain Borrower's corporate
existence  and  all  of  its  licenses,  permits,  trade  names,  trade  styles,
governmental approvals,  rights,  privileges and franchises reasonably necessary
to conduct its business;  conduct its business in an orderly and regular manner;
comply  with the  provisions  of all  documents  pursuant  to which  Borrower is
organized and/or which govern Borrower's  continued  existence;  and comply with
the  requirements of all applicable laws,  rules,  regulations and orders of any
governmental authority and requirements reasonably necessary for the maintenance
of  Borrower's  insurance,   licenses,   permits,  trade  names,  trade  styles,
governmental approvals,  rights,  privileges and franchises reasonably necessary
for the continued business of Borrower as currently  constituted,  except to the
extent it would not cause a Material Adverse Change.

          H. Statements  Regarding  Collateral.  Furnish to Lender promptly upon
request therefor  statements of the terms,  conditions and status of payments on
all Accounts and other  instruments,  documents and agreements which at the time
of the request  constitute a part of the  Collateral.  Lender may,  from time to
time, either before or after an Event of Default,  by reasonable means,  verify,
in its own name or such other name as Lender may choose,  the  validity,  amount
and any other matters relating to  Accounts and other instruments, documents and

                                       24
<PAGE>

agreements by means of mail, telephone or otherwise,  and Borrower shall use its
best efforts to assist Lender in verifying  such matters  promptly upon Lender's
request therefor.

          I. Annual  Collateral  Report.  Provide to Lender as soon as possible,
but in any event  within  one  hundred  twenty  (120) days after the end of each
fiscal year of Borrower,  an asset  register  update setting forth in reasonable
detail an inventory of all Collateral and such  information with respect thereto
as Lender reasonably may request.

          J.  Litigation.  Promptly  give notice in writing to Lender of (i) any
litigation  pending or instituted against Borrower  potentially  involving Fifty
Thousand  Dollars  ($50,000) or more,  (ii) any  litigation  overtly  threatened
against Borrower potentially involving Fifty Thousand Dollars ($50,000) or more,
(iii) any  litigation  involving or affecting the Alabama  Project or any of the
Transaction  Documents,  or (iv) any litigation  pending,  instituted or overtly
threatened  involving a claim for injunctive  relief. Not later than one hundred
twenty  (120) days after the end of each  fiscal  year of  Borrower,  deliver to
Lender  a  report  of all  litigation  pending  or  overtly  threatened  against
Borrower,  or to which  Borrower  is  otherwise  a party or which  involves  the
Alabama  Project or any of the Transaction  Documents,  in such detail as Lender
may reasonably request.

          K. Taxes and Other Liabilities. Pay and discharge when due any and all
Debt, obligations,  assessments and taxes, real and personal,  including federal
and state income  taxes,  except such as Borrower  may in good faith  contest by
appropriate proceedings promptly instituted and diligently conducted and if such
reserve or other  appropriate  provisions,  if any, as are proper in  accordance
with GAAP shall have been made therefor and maintained.

          L. Notice to Lender. Promptly, but in no event more than five (5) days
after  becoming aware of the occurrence of each such event or matter give notice
in  writing  to Lender of (i) the  occurrence  of any  Event of  Default  or any
Default, (ii) any change in name, identity or corporate structure of Borrower or
(iii) any loss through fire, theft, liability, property damage or other casualty
in excess of an aggregate of Fifty Thousand Dollars ($50,000).

          M. Insurance.

               (i) Obtain, maintain and keep in force insurance of the types and
in  amounts  customarily  carried  in  lines of  business  similar  to  Borrower
including fire, hazard insurance, extended  coverage, public liability, property


                                       25
<PAGE>

damage,  extra  expense and business  interruption  and  worker's  compensation,
carried  with  companies,  as required by law and  pursuant to each  contract or
agreement entered into by Borrower in connection with the Alabama Project and in
amounts  satisfactory  to  Lender  in its  reasonable  discretion,  and  obtain,
maintain and keep in force such other insurance as Lender may reasonably request
from  time to time,  and at all times  maintain  insurance  upon the  Collateral
covering  such  risks  and in such  amounts  as shall be  necessary  to  prevent
Borrower from being a co-insurer; and

               (ii) On or about  the date of this  Agreement  and at the time of
issuance  or  renewal of any  insurance  policy of  Borrower,  deliver to Lender
certificates  of such  insurance,  each of which  such  certificates  shall name
Lender as a lender's loss payee or additional insured, as appropriate, in a form
satisfactory to Lender and shall prohibit  cancellation  or modification  except
upon thirty (30) days' prior written notice to Lender.

          N. Stock Powers. Grant  Lender  appropriate stock powers to the extent
any securities become part of the Collateral.

          O. Subordination. Immediately  notify  Lender  of  the creation of any
Debt or other obligations in favor of any of Borrower's  officers,  directors or
Related  Persons,  and  immediately  cause all such Debt and  obligations  to be
subordinated,  pursuant  to  subordination  agreements  in  form  and  substance
reasonably satisfactory to Lender, to the Obligations.

          P. Defense of Actions.

               (i) At Borrower's sole cost and expense, appear in and defend any
action or  proceeding  which  may  adversely  affect  Lender's  interest  in the
Obligations or the Transaction  Documents or Lender's  security  interest in and
liens upon the Collateral; and

               (ii) At  Borrower's  sole cost and expense,  appear in and defend
any action or proceeding  which may  adversely  affect  Borrower's  title to any
Collateral.

          Q. Collateral. At  Borrower's  sole  cost  and  expense,  at all times
maintain  or cause to be  maintained,  as the  case may be,  in favor of  Lender
valid,  continuing and perfected first priority security interests (subject only
to the Permitted  Liens relating  thereto) in all of the  Collateral,  take such
actions as Lender deems reasonably necessary and appropriate to protect Lender's

                                       26
<PAGE>

security interests in such Collateral,  and provide to Lender such assurances as
Lender may reasonably require as to Borrower's compliance herewith.

          R. Opinion of Counsel.  Promptly  following  execution and delivery of
this  Agreement,  deliver to Lender an opinion of counsel in the form of Exhibit
5.01.R hereto.

     SECTION  5.02.  Negative  Covenants.   Until  Borrower  has  satisfied  and
discharged  all of the  Obligations  under the Loan  Documents,  subject  to the
provisions of Section 8.01 hereof,  Borrower will not, without the prior written
consent of Lender (which shall not be unreasonably withheld):

          A. Use of Proceeds. Use the proceeds  of  the  Term  Loans  except  as
contemplated by Section 2.02.

          B. Other Debt.  Create,  incur or permit to exist any Debt, except (i)
the  liabilities  of  Borrower  to  Lender,   (ii)  accrued  expenses,   accrued
liabilities and Accounts Payable that are in each case also Current  Liabilities
incurred in the ordinary  course of Borrower's  business,  (iii) taxes  payable,
(iv) the Debt described on Schedule  5.02.B,(v) debt incurred or created to fund
the acquisition,  development,  building,  management and/or maintenance of coal
briquetting  facilities  and related  expenditures,  whether the  facilities are
intended to be developed by the Borrower or affiliated entities or sold to third
party  entities  (provided  that,  except for Liens with respect to the specific
facility or  equipment  related to such  specific  facility,  such Debt shall be
unsecured),  (vi) Debt  created or incurred  to fund  working  capital  needs or
obligations in aggregate outstanding amount not to exceed $1,000,000,  and (vii)
Debt created or incurred  solely to refinance  existing Debt of Borrower  (which
Debt was otherwise permitted pursuant to the foregoing clauses (i) through (vi).

          C.  Merger,  Consolidation,  Pledge of  Assets.  Make any  substantial
change in the nature of Borrower's business;  merge into or consolidate with any
Person; pledge,  encumber,  allow the creation of any Lien (other than Permitted
Liens) or grant any  security  interest  in or to any of its  assets  other than
security interests on specific coal briquetting  facilities or equipment related
to such specific  facilities to secure the Debt allowed under Section 5.02B;  or
do business in any corporate,  trade or fictitious  name other than as listed on
Schedule  4.18,  except  for any name  used by an  affiliated  entity  formed to
facilitate the financing, acquisition,  development, building, management and/or
maintenance of coal briquetting facilities.

          D. Sale of Assets. Sell, lease, assign,  transfer or otherwise dispose
of a substantial portion of Borrower's


                                       27
<PAGE>

property,  real or  personal,  outside  of the  ordinary  course  of  Borrower's
business,  except as contemplated by the Transaction Documents, the sale of coal
briquetting  facilities  or the  licensing  of  technology  related  to the coal
briquetting facilities,  or the sale of equity in an affiliated entity formed to
facilitate the financing, acquisition,  development, building, management and/or
maintenance of coal briquetting facilities

          E. Guarantees.  Guarantee  or  become  liable  in  any way, as surety,
endorser  (other than as  endorser of  negotiable  instruments  in the  ordinary
course  of  business),  accommodation  endorser  or  otherwise  for the Debts or
obligations  of any other  Person  (other than a subsidiary  or other  affiliate
controlled  by  Borrower  to the extent  such Debt is  permitted  under  Section
5.02.B), including without limitation any Hazardous Materials Claims (as defined
in Article IX hereof), except as to any Obligation.

          F. Auditor. Permit the replacement of Coopers & Lybran  as  Borrower's
independent  certified  public  accountants,  except  by  independent  certified
accountants satisfactory to Lender in its sole discretion.

          G. Loans,  Advances,  Investments.  Make any loans or advances  to, or
investments in, any Person, other than (i) credit terms offered to customers and
advances to  suppliers  in the  ordinary  course of  Borrower's  business,  (ii)
deposits (other than certificates of deposit) held by  federally-insured  banks,
(iii) investments in commercial paper maturing in two hundred-seventy (270) days
or less from the date of  issuance  which is rated Al or better  by  Standard  &
Poor's  Corporation or P1 or better by Moody's  Investors  Services,  Inc., (iv)
investments in direct obligations of the United States of America or obligations
of any agency  thereof  which are  guaranteed  by the United  States of America,
provided  that  such  obligations  mature  within  twelve  months of the date of
acquisition  thereof, (v) investments in certificates of deposit maturing within
one year from the date of acquisition thereof, issued by a bank or trust company
organized  under the laws of the  United  States or any  state  thereof,  having
capital,  surplus and undivided profits aggregating at least One Hundred Million
Dollars ($100,000,000) and the long-term deposits of which are rated A or better
by  Moody's  Investors  Services,  Inc.  or  equivalent  by  Standard  &  Poor's
Corporation,  (vi) investments in banker's  acceptances maturing within five (5)
days from the date of  acquisition  thereof,  issued by a bank  which  meets the
criteria set forth in clause (v) of this Section 5.02.G, (vii) investments in or
loans  and  advances  to an  Affiliate  of  Borrower  formed to  facilitate  the
financing, acquisition,  development, building, management and/or maintenance of


                                       28
<PAGE>

coal briquetting facilities, or (viii) agreements with a third party to purchase
a coal briquetting  facility from the Borrower or an affiliate of Borrower on an
installment basis.

          H. Salarie  and  Other  Compensation  and   Perquisites;  Payments  to
Related  Persons.  Make  any  payments  to a  Related  Person,  other  than  pay
compensation  in any fiscal  year of  Borrower in the amounts and to the Persons
listed on Schedule 5.02.H.

          I. Pension Plans. Create an ERISA Plan.

          J. No Material  Adverse Change.  Permit any Material Adverse Change to
occur or enter into any transaction,  contract or agreement or make any material
change in or to any of Borrower's  business  objectives,  purposes or operations
which in any respect  may  reasonably  be  expected to cause a Material  Adverse
Change.

          K. Removal,  Storage and Preparation of Records. Either (i) remove any
of  Borrower's  records from the  locations  set forth on Schedule 4.10 attached
hereto, other than in the ordinary course of business or (ii) enter into, modify
or terminate any agreement  with an  accounting  firm or service  bureau for the
preparation or maintenance of Borrower's accounting records.

          L. Stock Transactions. Distribute, sell, issue or convey any shares of
Borrower's  capital  stock  except  in  compliance with all applicable state and
federal securities laws.

          M. Fiscal  Year.  Change  the  fiscal  year  end   of   Borrower  from
September 30.

          N. Assignment of Rents. Assign, as lessor or sublessor as the case may
be, the  rents, royalties or income of the Collateral or any part thereof (other
than to Lender or as a consequence of the grant of Permitted Liens).

          O. Acquisitions.   Purchase   or   otherwise   acquire  (i)   all   or
substantially  all of the  assets  of or (ii) any class of stock of or (iii) any
partnership  or  joint  venture  interest  in or with,  any  Person,  except  in
connection with the construction, financing, maintenance, operation or sale of a
briquetting facility in the ordinary course of Borrower's business.

          P. Affiliate   Transactions.  Enter  into,  or  be  a  party  to,  any
transaction  with  any  of  Borrower's  Related Persons,  except in the ordinary
course  of  business  pursuant  to  the  reasonable  requirements  of Borrower's



                                       29
<PAGE>


business  and upon fair and  reasonable  terms  which  were fully  disclosed  in
writing to Lender and are no less  favorable  to Borrower  than  Borrower  could
obtain in a  comparable  arm's  length  transaction  with a Person  who is not a
Related Person.

          Q. Sales. Back date, post date or redate any Account, invoice or sale.

          R. Prepayments.  Voluntarily  prepay  any  Debt  prior  to  the stated
maturity thereof.

     SECTION 5.03. Collateral. Borrower further agrees and covenants to:

          A.  Promptly  deliver  possession  to Lender,  and assign for security
purposes to Lender, all chattel paper, instruments,  certificated securities and
documents  necessary for the perfection of Lender's senior security interests in
the Collateral,  subject to Permitted Liens;  provided,  however, that until the
occurrence  of an  Event of  Default  or the  occurrence  and  continuance  of a
Default, Lender will, upon Borrower's request, return possession of such chattel
paper,  instruments and documents to Borrower,  as Lender's bailee or agent, but
only to the extent  reasonably  necessary for Borrower to enforce or collect the
goods or obligations evidenced by such chattel paper, instruments and documents.

          B. If Lender requests,  (i) promptly execute and deliver to Lender any
notice, financing or continuation statement,  instrument, document, agreement or
other papers  (including  any  assignment of claim form under or pursuant to the
federal  Assignment  of Claims Act, 31 USC ss. 3726, or any successor or amended
version thereof, or any regulation  promulgated under or pursuant to any version
thereof),  (ii) stamp on its records  concerning the Collateral (and/or enter in
its computer  records  concerning the  Collateral)  and add on all chattel paper
constituting a portion of the  Collateral a notation,  in form  satisfactory  to
Lender,  of Lender's  security  interest  hereunder and/or (iii) perform any act
reasonably  requested  by Lender that may be  necessary  or that Lender may deem
advisable to create,  perfect,  preserve,  validate or otherwise  protect any of
Lender's security interests in the Collateral, subject to Permitted Liens, or to
enable Lender to exercise and enforce  Lender's rights hereunder or with respect
to any such security interests.

          C. Refrain from signing or filing or authorizing the signing or filing
of  any  financing  statement(s)  under  the  Uniform  Commercial  Code  of  any
jurisdiction  with  respect  to  the Collateral  or any portion thereof in which


                                       30
<PAGE>

Borrower is named as debtor,  except as herein  provided or in  connection  with
Permitted  Liens,  and refrain from  delivering  possession of any of Borrower's
assets to any Person,  except as herein  provided or in the  ordinary  course of
Borrower's business.

          D. Provide Lender with ten (10) Business Days' prior written notice of
any proposed  transfer or change in any of Borrower's  sites or facilities  from
the  jurisdictions  set forth in Schedule  4.10  hereof,  and/or the addition or
creation of new sites,  facilities or places of business in jurisdictions  other
than those set forth in Schedule  4.10, in each case,  wherein any Collateral is
to be located for any period of time whatsoever. In addition, Borrower agrees to
provide  Lender  with  ten (10)  Business  Days'  prior  written  notice  if any
Collateral  is or will be removed from the  jurisdictions  set forth in Schedule
4.10 for a period of more than one (1)  month.  Borrower  further  agrees (i) to
execute and deliver to Lender, prior to (A) any such change in jurisdiction, (B)
the use or  operation  of any such site,  facility or place of business by or on
behalf of Borrower, or (C) such removal of any such Collateral, all instruments,
documents and other agreements (including financing statements and/or amendments
thereto or documents or certificates of title) as Lender may require to perfect,
or assure the continued  perfection  of, a first  priority lien and/or  security
interest in all such Collateral (except for Permitted Liens), and (ii) to pay to
Lender,  upon demand,  all reasonable costs and expenses  (including  Attorneys'
Fees and  disbursements)  incurred by Lender in connection with the preparation,
execution and delivery of such documents.

          E. Promptly  notify Lender in writing if Borrower  acquires an item of
Collateral worth in excess of Fifty Thousand  Dollars  ($50,000) that is covered
by a document or certificate of title or similar document or instrument.

          F. Cause the  Collateral  to be  maintained  and preserved in the same
condition,  repair and working order as when acquired by Borrower, ordinary wear
and tear excepted, and forthwith, or in the case of any loss or damage to any of
the Collateral,  promptly after the occurrence thereof, make or cause to be made
all repairs,  replacements, and other improvements in connection therewith which
are  necessary or desirable to such end and which are  economically  reasonable,
and not  permit  any  material  item of  Collateral  to become a fixture to real
estate  or an  accession  to any  personal  property  which  is not  part of the
Collateral.

          G. Pay promptly when due all property and other taxes, assessments and
governmental  charges  or  levies imposed upon, and all claims (including claims
for labor, materials and supplies) against, the Collateral, except to the extent


                                       31
<PAGE>

the validity  thereof is being  contested by appropriate  proceedings,  promptly
initiated  and  conducted  in good faith and with due  diligence  and so long as
Lender's interest in the Collateral is not impaired or jeopardized.

          H. Until Lender exercises its rights to collect Accounts, collect with
diligence all of Borrower's Accounts.

                                   ARTICLE VI
                                     DEFAULT

     SECTION  6.01.  Events of Default.  The  occurrence of any of the following
acts,  events or conditions  shall,  without any notice,  grace or right to cure
except as expressly  provided in this Agreement,  constitute an event of default
("Event of Default") hereunder:

          A.  Borrower  shall fail to pay (i) without  demand,  any principal or
interest  due for any of the  Obligations  owing to Lender  (whether  under this
Agreement,  the Note) which failure  continues for three (3) days from when due,
or (ii) within ten (10) days following demand, any other amounts owing to Lender
(whether under this Agreement, the Note, or any other of the Loan Documents) not
referred  to in clause (i) due for any of the  Obligations  or any other fees or
other amounts not referred to in clause (i).

          B. Borrower shall fail to perform or observe any covenant set forth in
Sections 5.01.C, or Section 5.02.A,  5.02.B,  5.02.C, 5.02.D, 5.02.E, 5.02.F, or
5.02R hereof.

          C.  Borrower  shall fail to perform or observe  any term,  covenant or
condition (i) set forth in Sections  5.01.B,  or 5.01.J within fifteen (15) days
after a Responsible  Officer has knowledge thereof,  or (ii) otherwise contained
herein and not  specified in clauses  (A),  (B) or (C)(i) of this Section  6.01,
which  continues for fifteen (15) days after written notice thereof to Borrower;
provided,  however,  that if such  failure is curable and a delay in  exercising
Lender's  rights under Article VII will not materially and adversely  affect the
Collateral or the rights of Lender,  so long as Borrower is diligently  pursuing
such cure,  Borrower shall have an additional  period after the initial  written
notice to cure such failure,  not to exceed  seventy-five  (75) days;  provided,
further  however,  that  Borrower  shall  not  be  entitled  to  any  notice  or
opportunity  to cure  under  this  Section  6.01.C  if  Lender  has,  on two (2)
occasions in the previous six (6) month period, given Borrower notice under this
Section 6.01.C.

                                       32
<PAGE>

          D. Any  representation or warranty hereunder or under any of the other
Transaction  Documents  shall have been  untrue or  misleading  in any  material
respect when made.

          E. A default shall occur under any  agreement,  document or instrument
(other  than the  Transaction  Documents),  to which  Borrower  is a party,  the
consequences of which would have an adverse effect  potentially  involving Fifty
Thousand Dollars ($50,000) or more relating to the business of Borrower,  on the
Collateral,  relating to Lender's  interest  in the  Collateral,  or relating to
Borrower's ability to pay or perform the Obligations.

          F. The  entry of an order  for  relief  under  Title 11 of the  United
States Code as to Borrower or the determination of such Borrower as insolvent or
bankrupt  pursuant to the provisions of any state insolvency or bankruptcy laws;
the commencement by Borrower of any case, proceeding or other action seeking any
reorganization,  arrangement,  composition, adjustment, liquidation, dissolution
or similar  relief  for  itself  under any  present  or future  statute,  law or
regulation  relating to bankruptcy,  insolvency,  reorganization or other relief
for debtors;  Borrower's  consent to,  acquiescence  in or attempt to secure the
appointment  of any  Receiver  of all or any  part of its  properties  or of the
Collateral;  Borrower  shall  generally  not pay its debts as they become due or
shall  admit in writing its  inability  to pay its debts or shall make a general
assignment  for the benefit of creditors;  or Borrower  (including  the board of
directors of Borrower)  shall take any corporate  action to authorize any of the
acts set forth above in this paragraph.

          G. Any case,  proceeding  or other action  against  Borrower  shall be
commenced  seeking to have an order for relief entered against it as a debtor or
seeking any reorganization,  arrangement,  composition, adjustment, liquidation,
dissolution  or  similar  relief  under any  present or future  statute,  law or
regulation  relating to bankruptcy,  insolvency,  reorganization or other relief
for debtors,  or seeking  appointment of any Receiver for Borrower or for all or
any substantial part of its property,  and such case, proceeding or other action
is not dismissed within sixty (60) days after it is filed.

          H. The  filing  of any  claim or Lien  (other  than  Permitted  Liens)
against the  Collateral or any part thereof,  and the continued  maintenance  of
such  claim  or Lien  for a  period  of  thirty  (30)  days  without  discharge,
satisfaction or adequate bonding thereof, or the sale, hypothecation, conveyance
or other  disposition  of any of the  Collateral  other than within the ordinary
course of Borrower's business.

                                       33
<PAGE>

          I.  Any  of  the  Transaction  Documents,  at  any  time  after  their
respective  execution and delivery and for any reason, shall cease to be in full
force and effect as executed and delivered in their entirety or be declared null
and void,  or the  validity or  enforceability  thereof  shall be  contested  by
Borrower or any stockholder of Borrower, or Borrower shall deny any liability or
obligation ascribed to it under any of the Transaction Documents.

          J. Any of the Security  Documents,  at any time after their respective
execution and delivery and for any reason,  shall cease to constitute  valid and
subsisting  liens and/or valid and  perfected  security  interests in and to the
property purported to be subject thereto.

          K. A  judgment,  order or decree has been  entered or  otherwise  made
effective  against Borrower in an amount equal to or greater than Fifty Thousand
Dollars  ($50,000) and either (i) such judgment,  order or decree is not vacated
or stayed  pending appeal within thirty (30) days after the date of entry or the
effective date thereof,  or (ii) if so stayed,  the stay is lifted or the appeal
is  unsuccessful,  or (iii) such  judgment  is not paid,  settled  or  otherwise
discharged or satisfied within thirty (30) days.

          L. Lender  declares  an  Event  of  Default  pursuant  to Section 9.06
hereof.

          M. Any (i) event of default  (howsoever  designated) shall occur under
any other Transaction  Document which permits Lender or any of its Affiliates to
accelerate the Obligations or terminate such Transaction Document, or (ii) other
default (howsoever  designated) shall occur under any other Transaction Document
and such default shall continue  after any  applicable  grace and notice periods
applicable thereto,  or, if no grace or notice period is provided,  such default
is not remedied within thirty (30) days after written notice thereof.

          N. Borrower shall fail to pay any amount of principal on any Debt (but
excluding Debt evidenced by the Note) of Borrower in an aggregate amount of more
than Fifty Thousand Dollars ($50,000),  or any interest or premium thereon, when
due (whether by scheduled maturity, required prepayment, acceleration, demand or
otherwise) and such failure shall continue after the applicable grace period, if
any,  specified in the  agreement or  instrument  relating to such Debt;  or any
default  under any  agreement or  instrument  relating to any such Debt,  or any
other event,  shall occur and shall continue after the applicable  grace period,
if any, specified in such agreement or instrument, if the effect of such default


                                       34
<PAGE>

or event is to  accelerate,  or to permit the  acceleration  of, the maturity of
such Debt; or any such Debt shall be declared to be due and payable, or required
to be prepaid (other than by a regularly scheduled required  prepayment),  prior
to the stated maturity thereof.

          P. Any Person or related  group of Persons  acquires,  or obtains  the
right to acquire, whether pursuant to options,  warrants or otherwise, more than
fifty percent (50%) of any class of the then outstanding  voting common stock of
Borrower (calculated, in the case of any options, warrants or similar rights, as
if such  Person's  or  group's  right  to  acquire  voting  stock,  and no other
unrelated Person's rights, were exercised).


                                   ARTICLE VII
                    RIGHTS, POWERS AND REMEDIES UPON DEFAULT

     SECTION 7.01.  Remedies. If  any Event of Default shall occur and continue,
Lender may, at its election, and  without demand  or notice of  any kind, do any
one or more of the following:

               (i)  Declare  all  of  Borrower's  Obligations  to  Lender  to be
immediately due and payable,  whereupon all unpaid principal,  interest and fees
in respect of such  Obligations,  together with all of Lender's costs,  expenses
and Attorneys' Fees related thereto,  whether under the terms of this Agreement,
the other  Transaction  Documents or  otherwise,  shall be  immediately  due and
payable;

               (ii) Exercise any and all rights and remedies available to Lender
under any applicable law, including without limitation all remedies of a secured
party  under  the  Code  (whether  or not  the  Code  applies  to  the  affected
Collateral)  and also (a) require  Borrower,  at  Borrower's  sole  expense,  to
promptly  assemble all or part of the  Collateral as directed by Lender and make
it available to Lender at a place or places to be  designated  by Lender  (which
may include Borrower's place of business,  where the Collateral may be stored at
Borrower's expense),  and (b) without notice except as specified below, sell the
Collateral or any part thereof in one or more parcels at public or private sale,
at Borrower's place of business,  at any of Lender's  offices or elsewhere,  for
cash, on credit or for future delivery,  and upon such other terms as Lender may
deem commercially  reasonable;  provided,  that (a) to the extent notice of such
sales shall be  required  by law, at least ten (10) day's  notice to Borrower of
the times and places of any public sale or the time after which any private sale
is to be made shall constitute reasonable notification,  (b) Lender shall not be
obligated  to make any sale of  Collateral  regardless  of notice of sale having


                                       35
<PAGE>

been given and,  (c) Lender may adjourn any public or private  sale from time to
time by announcement  at the time and place fixed  therefor,  and such sale may,
without  further  notice,  be made at the  time  and  place  to  which it was so
adjourned;

               (iii) Exercise any and all rights  and remedies granted to Lender
under the terms of this Agreement or any of the other Transaction Documents;

               (iv) Instruct any warehouseman  then in  possession or custody of
any of the Collateral to act thenceforth only on instructions of Lender;

               (v)  Foreclose  or  otherwise  enforce  any or  all  of  Lender's
security  interests  in any manner  permitted  by law, or  provided  for in this
Agreement or the other Loan Documents or in any security  agreement entered into
by  Lender  and  Borrower,  in such  order as  Lender  in its sole and  absolute
discretion may determine;

               (vi)  Exercise,  to the extent  permitted by applicable  law, the
following  rights and remedies  regarding  the  appointment  of a Receiver:  (a)
Lender may have a Receiver  appointed as a matter of right; (b) the Receiver may
be an employee  of Lender and may serve  without  bond;  and (c) all fees of the
Receiver and his or her attorney shall become part of the  Obligations and shall
be payable on demand,  with  interest at the Default  Interest Rate from date of
expenditure until repaid;

               (vii) At any time,  without  prior  notice to  Borrower,  collect
Collateral Proceeds and give notice of Lender's security interest to any and all
Persons,  and Borrower  does hereby  irrevocably  make,  constitute  and appoint
Lender its true and lawful  attorney-in-fact,  coupled with an interest and with
power of  substitution,  with power:  to  receive,  open and dispose of all mail
addressed to Borrower; to endorse the names of Borrower upon any checks or other
evidences  of  payment  that may come into the  possession  of  Lender  upon the
Collateral  or as proceeds of  Collateral;  to endorse on behalf of Borrower any
document or instrument constituting or relating to the Collateral; in Borrower's
name or otherwise, to demand, sue for, collect and give acquittance for, any and
all moneys due or to become due upon the Collateral; to compromise, prosecute or
defend any action,  claim or proceeding with respect thereto;  and to do any and
all things necessary and proper to carry out the purpose herein contemplated; at
any time in Lender's  discretion,  transfer any Collateral  into its own name or
that of its nominee  and  receive the  payments,  rents,  income,  and  revenues
therefrom, hold the same as security for the Obligations and, at Lender's option

                                       36
<PAGE>

or upon Borrower's  written  request,  apply it to payment of the Obligations in
such order of preference as Lender may determine;  and insofar as the Collateral
consists of Intangibles,  insurance policies, instruments, chattel paper, choses
in action, or similar property, Lender may demand, collect, receipt for, settle,
compromise,  adjust, sue for, foreclose,  or realize on the Collateral as Lender
may in Good Faith determine, whether or not any Obligations are then due; and

               (viii)  apply any  proceeds of  insurance  toward  payment of the
Obligations,  whether  or not due,  in such order of  application  as Lender may
determine.

     SECTION  7.02.  Protection  and  Preservation  of  Collateral  and  Rights;
Protective  Advances.  Upon the  occurrence  and during the  continuance  of any
Default  or upon  the  occurrence  and  during  the  continuance  of an Event of
Default,  if Borrower shall fail to make any payment or perform any act provided
in this  Agreement or any of the other  Transaction  Documents,  Lender may, but
shall not be obligated to, without  notice to or demand upon Borrower,  make any
such payment or perform any such act, and further may pay, purchase,  contest or
compromise any Lien on any of the Collateral that in the reasonable  judgment of
Lender appears to affect said property.  Borrower  hereby  irrevocably  appoints
Lender as its true and lawful  attorney-in-fact,  coupled  with an interest  and
with power of  substitution,  to make any such payment  and/or  perform any such
act. In  exercising  any of said powers,  Lender may, but shall not be obligated
to, incur any liabilities and expend whatever amounts which Lender in Good Faith
may deem necessary therefor. All sums so incurred or expended by Lender shall be
part of the  Obligations  and shall be due and  payable by  Borrower  to Lender,
together  with  interest  thereon  from the date of  expenditure  at the Default
Interest Rate, together with all costs and expenses,  including Attorneys' Fees,
incurred by Lender in  connection  with the  exercise  of its rights  hereunder,
immediately on demand by Lender.

         SECTION 7.03.  Election.  Lender shall have the right to enforce one or
more remedies hereunder, successively or concurrently, and such action shall not
operate as an  election of  remedies  or  otherwise  operate to estop or prevent
Lender from pursuing any further remedies which it may have.

         SECTION 7.04.  Waiver. No failure or delay on the part of Lender, or of
any  holder  of any  instrument  delivered  to Lender  in  connection  with this
Agreement,  in the  exercise of any power,  right or privilege  hereunder  shall
operate as a waiver  thereof,  nor shall any single or partial  exercise  of any
such power,  right or privilege  preclude other or further exercise of any other


                                       37
<PAGE>

power, right or privilege. All rights and remedies existing under this Agreement
or any other  agreement,  document  or  instrument  executed  and  delivered  by
Borrower  to Lender  are  cumulative  to,  and not  exclusive  of, any rights or
remedies otherwise available under any applicable law.

     SECTION  7.05.  Power of Attorney.  Borrower  hereby  irrevocably  appoints
Lender as its true and lawful  attorney-in-fact,  coupled  with an interest  and
with  power  of  substitution,  to do any and  all of the  following  after  the
occurrence and during the continuance of an Event of Default: to take control in
any manner of any cash and noncash  items of payment or  Proceeds of  Collateral
which come into  Lender's  possession;  to endorse  the name of  Borrower on any
notes,  acceptances,  checks,  drafts,  money  orders,  chattel  paper  or other
evidences of payment that may come into Lender's possession;  to sign Borrower's
name on any invoice or document  relating to any  Collateral,  on drafts against
customers, and on notices to customers; to notify the post office authorities to
change the address for delivery of Borrower's  mail to an address  designated by
Lender; to receive,  open and process all mail addressed to Borrower;  and to do
all things  necessary  to preserve or protect the  Collateral  and to  otherwise
carry out this Agreement.  Provided Lender acts in Good Faith, Borrower ratifies
and  approves  all acts of such  attorney,  and neither  Lender nor the attorney
shall be  liable  for any acts or  omissions  nor for any error of  judgment  or
mistake of fact or law absent gross negligence or willful  misconduct by Lender.
All checks or other forms of  remittance so received by Lender shall be endorsed
in such manner as Lender may designate.  Borrower's signature or name, as may be
appropriate,  may be inserted by Lender in longhand, in typewriting or by rubber
stamp. Every such endorsement, however signed or made, shall be deemed to be the
valid  endorsement of Borrower.  Borrower  further hereby  irrevocably  appoints
Lender as its true and lawful  attorney-in-fact,  coupled  with an interest  and
with power of substitution,  for the purpose, at any time or times, of executing
for Borrower,  and in  Borrower's  name,  financing  statements  and  amendments
thereto  with  respect  to any of the  Collateral  and  filing  any of the same.
Borrower  further  agrees  that a copy  of  this  Agreement  may be  filed  as a
financing statement.

     SECTION  7.06.  Entry Upon  Premises.  Upon the  occurrence  and during the
continuance of a Default or upon the occurrence and during the continuance of an
Event of  Default,  Lender  shall have the right to enter upon the  premises  of
Borrower  and upon any  premises  where  Collateral  located or  believed  to be
located  and to  receive  and open  all mail  directed  to  Borrower;  provided,
however,  that Lender shall use reasonable  efforts to turn over to Borrower all
such mail which does not relate to the  Collateral.  Lender shall have the right


                                       38
<PAGE>

to obtain access to Borrower's data processing equipment,  computer hardware and
computer software relating to or containing information regarding the Collateral
and to use all of the foregoing  and the  information  contained  therein in any
manner  Lender in Good  Faith  deems  appropriate.  Lender  is hereby  granted a
license and right to use,  without  charge,  until the Obligations are fully and
finally paid in cash, Borrower's labels,  patents,  copyrights and rights of use
of any name, trade secrets, trade names, trademarks,  service marks, advertising
material  or any  property of a similar  nature in  completing  the  production,
advertising for sale and sale of any Collateral.

     SECTION 7.07.  Notification  of  Customers.  At any time or times after the
occurrence and during the continuance of any Event of Default, Lender shall have
the right to contact  any Person  obligated  to Borrower on any Account or other
right to payment and to instruct such Account  Debtor or other person to deliver
all payments directly to Lender.

     SECTION  7.08.  Failure to Pay.  If  Borrower  fails to make any payment or
deposit,  furnish the required proof or take the required action, as provided in
this  Agreement or any of the other  Transaction  Documents,  Lender may, in its
sole and absolute discretion after notice to Borrower,  make payment of the same
or part thereof or take the required action. Lender may conclusively rely on the
usual statements of the amount owing or other official  statements issued by the
appropriate  governmental  agency.  Each  amount so paid by  Lender  and cost or
expense incurred by Lender shall be part of the Obligations and shall be due and
payable by Borrower to Lender,  together with interest  thereon from the date of
expenditure at the Default Interest Rate,  together with all costs and expenses,
including Attorneys' Fees, incurred by Lender in connection with the exercise of
its rights hereunder, immediately on demand by Lender. No payment made by Lender
or cost or expense incurred by Lender shall constitute (i) an agreement by it to
make  similar  payments or incur any similar  cost or expense in the future,  or
(ii) a waiver by Lender of any Default or Event of Default under this Agreement.
Lender need not inquire as to, or contest the  validity  of, any  expense,  tax,
security interest, encumbrance or Lien, and receipt of the usual official notice
of the payment  thereof shall be  conclusive  evidence that the same was validly
due and owing.

     SECTION 7.09. Application of Collateral Proceeds.  After the occurrence and
during the continuance of an Event of Default,  Borrower hereby grants to Lender
the right to, and upon Borrower's  written  request Lender shall,  apply any and
all Proceeds from the sale or disposition of the Collateral  towards the payment
of the  Obligations in such order as Lender from time to time may elect.  Lender


                                       39
<PAGE>

shall have no obligation to reconvey any of the Collateral  unless and until all
of the Obligations have been satisfied and discharged in full.

     SECTION  7.10.  Enforcement  of  Borrower's  Rights.  Lender  shall have no
obligation  to take any action to enforce  any rights  running to the benefit of
Borrower in respect of any items of Collateral,  to preserve any rights in or to
the Collateral  against any Person, to make any demand upon or pursue or exhaust
any rights or remedies against Borrower or others with respect to payment of the
Obligations,  to pursue or exhaust any rights or remedies with respect to any of
the  Collateral or any other  security for the  Obligations,  or to marshall any
assets in favor of Borrower or any other Person  against or in payment of any or
all of the Obligations. To the extent that Borrower makes a payment to Lender or
Lender enforces a security  interest or exercises its rights of set off and such
payment or the  proceeds of such  enforcement  or setoff or any part thereof are
subsequently invalidated,  declared to be fraudulent or preferential, set aside,
avoided and/or  required to be repaid under any bankruptcy law, state or federal
law, common law or equitable  cause,  then, to the extent of such recovery,  the
Obligations or part thereof originally intended to be satisfied shall be revived
and continued in full force and effect with all Collateral as security therefor,
as if such  payment  had not been made or such  enforcement  or  setoff  had not
occurred.

     SECTION 7.11. Exercise of Remedies.  Borrower acknowledges that portions of
the Collateral may be difficult to preserve and dispose of and may be subject to
complex  maintenance  and management;  accordingly,  Borrower agrees that Lender
shall have the widest possible latitude in the method and manner of the exercise
of its rights, powers and remedies under this Agreement.

     SECTION 7.12.  Equitable Remedies.  Borrower recognizes that if it fails to
perform,  observe or  discharge of its  obligations  or  liabilities  under this
Agreement,  any  remedy at law may  prove to be  inadequate  relief  to  Lender.
Therefore, Borrower agrees that Lender, if Lender so requests, shall be entitled
to  temporary  and  permanent  injunctive  relief in any such case  without  the
necessity of proving, but without waiving, actual damages.

                                  ARTICLE XIII
                               GENERAL PROVISIONS

     SECTION 8.01. Survival of Terms. The warranties, representations, covenants
and  agreements  set  forth herein  and in any  other Loan Documents executed in
conjunction herewith or contemplated hereby shall  be cumulative and in addition


                                       40
<PAGE>

to any and all  warranties,  representations,  covenants  and  agreements  which
Borrower may give, or cause to be given, to Lender  hereafter,  and shall remain
effective until the first of the following to occur:  (i) the termination of the
Commitments and the  satisfaction  in full of all of the  Obligations  under the
Loan Documents,  or (ii) the conversion of all of the outstanding Term Loans and
Commitments into Shares pursuant to Article X hereof;  provided,  however,  that
the Registration  Rights Agreement and all of the Purchase  Agreement  Documents
shall survive;  provided,  further,  that the obligations under Section 8.13 and
Article IX shall  survive.  Notwithstanding  the  foregoing,  from and after the
closing of the transfer of the Alabama  Project  pursuant to the Alabama Project
Purchase Agreement,  the covenants contained in Sections 5.01.D, 5.01.H, 5.01.I,
5.01.M and 5.03 shall terminate.

     SECTION   8.02.   Presentment.   Lender  shall  not  be  required  to  make
presentment, demand or protest or, except as may otherwise be expressly provided
in this Agreement or in any other agreements, documents and instruments executed
in  conjunction  herewith or  contemplated  hereby,  give any notice or take any
action to preserve rights against Borrower or any other Person or the Collateral
in connection with any provision of the Loan Documents.

     SECTION 8.03.  Successors and Assigns.  This Agreement shall bind and inure
to the benefit of the respective  successors and assigns of each of the parties;
provided,  however,  that neither party may assign this  Agreement or any rights
hereunder  without the other party's prior written  consent,  and any prohibited
assignment shall be absolutely void; provided, further, that such prohibition on
assignment  shall in no event apply to the transfer of Shares  after  Conversion
pursuant  to  Article X hereof,  which  shall  remain  in the sole  control  and
discretion of Lender (subject to the representations and warranties contained in
Article XI hereof); provided, further, that such prohibition on assignment shall
in no event  apply to the  assignment  by  Lender of all or any  portion  of its
rights hereunder after the occurrence of an Event of Default.  All references to
"Lender"  herein  shall be deemed to refer to and  include  Lender's  respective
successors  and assigns.  No consent to any  assignment  by Lender shall release
Borrower of any of the Obligations.

     SECTION  8.04.  Number.  The  singular  includes  the plural and the plural
includes the singular, if the context so requires.

     SECTION 8.05.  Governing Law. Without regard to  principles of conflicts of
law,  the  Transaction  Documents, including  without limitation this Agreement,


                                       41
<PAGE>

shall be construed in  accordance  with and governed by the laws of the State of
Utah, and all matters or disputes directly or indirectly  relating to or arising
in  connection  with the  Transaction  Documents,  or otherwise  relating to the
debtor-creditor  relationship  between Borrower and Lender, shall be governed by
the laws of the State of Utah;  provided,  however,  that where  applicable (and
except as otherwise  defined herein),  terms used herein shall have the meanings
given them in the Code;  provided  further,  that with respect to enforcement by
Lender of remedies  against any Collateral  which is real  property,  nothing in
this paragraph shall bar application of the law of the  jurisdiction  where such
real property Collateral is situated.

     SECTION 8.06. Notices and Addresses; Payments.

          A. All notices  required or permitted to be given under this Agreement
shall be in writing.  Notices may be served by  certified  or  registered  mail,
postage paid with return receipt  requested;  by private  courier,  prepaid;  by
telex, facsimile,  or other telecommunication  device capable of transmitting or
creating  a  written  record;  or  personally.  Mailed  notices  shall be deemed
delivered five days after mailing,  properly addressed.  Couriered notices shall
be deemed  delivered  when delivered as addressed,  or if the addressee  refuses
delivery,  when presented for delivery  notwithstanding  such refusal.  Telex or
telecommunicated  notices  shall be  deemed  delivered  when  receipt  is either
confirmed by confirming  transmission equipment or acknowledged by the addressee
or its office. Personal delivery shall be effective when accomplished.  Unless a
party  changes  its  address  by giving  notice to the other  party as  provided
herein,  notices shall be delivered to the parties at the addresses set forth in
Schedule 8.06.

          B.  All  payments   provided  for  in  this  Agreement  or  the  other
Transaction  Documents  shall be  delivered,  in the  manner  set  forth in such
documents,  to Lender by wire transfer in accordance with the  instructions  set
forth in Schedule 8.06.

     SECTION 8.07.  Severability;  Independence of Covenants.  Each provision of
this Agreement  shall be severable  from each other  provision of this Agreement
for  the  purpose  of  determining  the  legal  enforceability  of any  specific
provision.  All covenants under this Agreement shall be given independent effect
so that if a particular  action,  event or condition is not  permitted by any of
such covenants,  then the fact that it would be permitted by an exception to, or
be otherwise  within the  limitations  of, another  covenant shall not avoid the
occurrence  of a Default or an Event of Default if such  action is taken,  event
occurs, or condition exists.

                                       42
<PAGE>

     SECTION 8.08. Time. Time is of the essence of this Agreement and the other
Transaction Documents.

     SECTION 8.09. Necessity of Writing. Any consent,  modification,  amendment,
notice or  waiver  hereof  or  hereunder  must be in  writing  and  signed by an
authorized officer of Lender to be effective and enforceable against Lender, and
this Agreement cannot be changed orally or by conduct of the parties.

     SECTION 8.10. Integration.  This Agreement, together with the Schedules and
Exhibits referred to herein and the other Transaction Documents,  is intended by
the  parties  as a final  expression  of  their  agreement,  as a  complete  and
exclusive statement of the terms and conditions thereof,  and fully to integrate
the parties'  agreement.  No prior  understandings,  proposals or agreements not
contained  herein  or in the  Transaction  Documents  shall be  binding  upon or
enforceable  against the parties.  Acceptance of or  acquiescence in a course of
performance under the Transaction Documents shall not be relevant in determining
the  meaning  of  the  Transaction  Documents,  even  though  the  accepting  or
acquiescing party had knowledge of the nature of the performance and opportunity
for  objection.  The  rule  of law  that  ambiguities  in a  document  are to be
construed  against the  drafter  shall not apply to the  interpretation  of this
Agreement or the Transaction Documents.

     SECTION 8.11. Captions. The captions in this Agreement and on the Exhibits
hereto are for convenience of reference only and shall not modify or alter the
operative provisions hereof.

     SECTION 8.12. Lender's Expenses and Attorneys' Fees.

          A.  Following any Event of Default or Default,  Borrower  shall pay to
Lender,  promptly  on  demand  therefor,  all of  Lender's  costs  and  expenses
resulting from such Default or Event of Default. Without limiting the generality
of the  foregoing,  such sums shall include all  Attorneys'  Fees and reasonable
consultants' fees or accountants' fees incurred by Lender following such Default
or Event of Default in  exercising,  supervising,  enforcing or defending any of
its rights,  powers or remedies provided by this Agreement,  by any of the other
Transaction Documents,  or by law, whether or not suit is filed. Borrower agrees
that neither any of  Borrower's  obligations  hereunder nor any payments made by
them  hereunder  shall  result in any  waiver  by Lender of its  attorney-client
privilege   or  any  other  of  its   privileges   with  respect  to  the  legal
representation for which reimbursement is to be made pursuant hereto.


                                       43

<PAGE>

          B. All sums so incurred or expended by Lender pursuant to subsection A
of this  Section  8.12  shall be part of the  Obligations  and  shall be due and
payable by Borrower to Lender,  together with interest  thereon from the date of
expenditure at the Default Interest Rate, immediately on demand by Lender.

     SECTION 8.13. Indemnification.

          A.  Borrower  hereby  agrees to  indemnify  and defend  Lender and the
officers, directors,  employees and agents of Lender (herein collectively called
the "Indemnitees"  and individually each called an "Indemnitee")  from, and hold
the  Indemnitees  harmless  against,  any and all losses,  liabilities,  claims,
damages or expenses,  including  attorneys' fees and  disbursements  (all of the
foregoing  being  herein  collectively  called  the  "Indemnified  Liabilities")
incurred by any Indemnitee in connection with any  investigation,  litigation or
proceedings  arising out of, or relating to, the Term Loan;  provided,  however,
that the foregoing  indemnity  shall not apply to any  litigation  brought by an
Indemnitee against Borrower which is determined  adversely to such Indemnitee or
to losses, liabilities, claims, damages or expenses arising out of any violation
by an  Indemnitee  of a  statutory  duty  or the  gross  negligence  or  willful
misconduct of such Indemnitee. If and to the extent that the foregoing indemnity
may be unenforceable for any reason,  Borrower hereby agrees to make the maximum
contribution  to the  payment  and  satisfaction  of  each  of  the  Indemnified
Liabilities which is permissible under applicable law.

          B. Lender  hereby  agrees to  indemnify  and defend  Borrower  and the
officers,  directors,  employees  and agents of  Borrower  (herein  collectively
called the  "Borrower  Indemnitees"  and  individually  each  called a "Borrower
Indemnitee") from, and hold the Borrower  Indemnitees  harmless against, any and
all losses, liabilities,  claims, damages or expenses, including attorneys' fees
and  disbursements  (all of the foregoing being herein  collectively  called the
"Indemnified  Liabilities")  incurred by any Borrower  Indemnitee  in connection
with any investigation, litigation or proceedings arising out of a breach of the
representations of Lender under Section 11.1 hereof; provided, however, that the
foregoing  indemnity  shall not apply to any litigation  brought by any Borrower
Indemnitee  against  Borrower  which is  determined  adversely to such  Borrower
Indemnitee or to losses, liabilities, claims, damages or expenses arising out of
any  violation  by a  Borrower  Indemnitee  of a  statutory  duty  or the  gross
negligence  or willful  misconduct of such  Borrower  Indemnitee.  If and to the
extent  that  the  foregoing  indemnity  may be  unenforceable  for any  reason,



                                       44
<PAGE>

Borrower  hereby  agrees to make the  maximum  contribution  to the  payment and
satisfaction of each of the Indemnified  Liabilities  which is permissible under
applicable law.

          C. All obligations provided for in this Section 8.13 shall survive any
termination of this Agreement.

     SECTION 8.14. Agreement Governs. In the event of any inconsistency  between
the provisions of this Agreement and any other Transaction  Documents other than
the Note,  the  provisions of this  Agreement  shall govern and control.  In the
event of any  inconsistency  between the  provisions  of this  Agreement and the
provisions of the Note, the provisions of the Note shall govern and control.

     SECTION 8.15. Third Party Beneficiaries. This Agreement is made and entered
into for the sole  protection  and  benefit  of the  parties  hereto  and  their
permitted  successors  and assigns,  and neither this  Agreement  nor any of the
other  Transaction  Documents is intended to operate as, directly or indirectly,
nor shall be  construed  as  effecting  in any way,  directly or  indirectly,  a
waiver,  estoppel,  discharge,  release,  or other  modification of the parties'
rights  against any Person,  nor shall any other Person have any right of action
hereunder or be entitled to rely hereon or on the existence  hereof or claim any
rights or benefits hereunder.

     SECTION 8.16. Jurisdiction.

          A. Borrower hereby irrevocably agrees that any legal action,  suit, or
proceedings  against any of them with respect to any of the  Obligations  or any
other matter under or arising out of or in connection with this  Agreement,  the
Note or the other Transaction Documents or for recognition or enforcement of any
judgment rendered in any such action,  suit or proceedings may be brought in the
United States Courts sitting in the State of Utah, or in the courts of the State
of Utah, as Lender may elect,  and, by execution and delivery of this Agreement,
Borrower   hereby   irrevocably   accepts  and  submits  to  the   non-exclusive
jurisdiction of the aforesaid courts in personam  generally and  unconditionally
with respect to any such action,  suit, or proceeding  for itself and in respect
to of any of its property.

          B.  Borrower  further  agrees  that final  judgment  against it in any
action,  suit, or proceeding  referred to herein shall be conclusive  and may be
enforced  in any other  jurisdiction,  within or outside  the  United  States of
America, by suit on the judgment, a certified or exemplified copy of which shall
be conclusive  evidence of the fact and of the amount of Borrower's  obligations
and liabilities.  Borrower hereby irrevocably  appoints the Person so designated



                                       45
<PAGE>

on Schedule 8.06 hereto as its agent for service of process in any action,  suit
or proceeding referred to herein. Should the Person designated by Borrower under
this Section 8.16.B cease to be available for service of process,  Borrower will
forthwith irrevocably designate a designee,  appointee and agent within the City
of Salt Lake City,  State of Utah,  which  shall  irrevocably  consent to act as
such, with the powers and for the purposes specified in this subsection.

          C. Borrower further irrevocably  consents and agrees to the service of
any and all legal  process,  summons,  notices,  and documents out of any of the
aforesaid  courts in any such  action,  suit or  proceeding  by  mailing  copies
thereof by registered or certified mail, postage prepaid, to the Borrower at its
address  referred to in Section  8.06 hereof,  or to any other  address of which
Borrower shall have given notice pursuant to said Section 8.06 hereof, or to its
then  designee,  appointee and agent for service.  Borrower  agrees that service
upon Borrower or any such  designee,  appointee and agent as provided for herein
shall constitute valid and effective personal service upon Borrower and that the
failure  of any such  designee,  appointee  and agent to give any notice of such
service to Borrower  shall not impair or affect in any way the  validity of such
service or any judgment rendered in any action or proceeding based thereon.

          D. Nothing in this Section 8.16 shall, or shall be construed so as to,
limit the right of Lender to bring actions, suits or proceedings with respect to
the  Obligations  of Borrower  under,  or any other matter  arising out of or in
connection with, this Agreement, the Note or the other Transaction Documents, or
for recognition or enforcement of any judgment rendered in any such action, suit
or  proceeding,  in the courts of whatever  jurisdiction  in which the office of
Lender may be located or the  property of Borrower  may be found or as otherwise
shall to Lender seem  appropriate,  or to affect the right to service of process
in any jurisdiction in any other manner permitted by law.

          E. In addition, Borrower hereby irrevocably and unconditionally waives
any objection which Borrower may now or hereafter have to the laying of venue of
any  of  the  aforesaid  action,  suits  or  proceedings  arising  out  of or in
connection with this  Agreement,  the Note, or the other  Transaction  Documents
brought in any of the  aforesaid  courts,  and hereby  further  irrevocably  and
unconditionally  waives and  agrees not to plead or claim that any such  action,
suit or proceeding brought in any such court has been brought in an inconvenient
forum.


                                       46
<PAGE>

     SECTION  8.17.  WAIVER OF JURY TRIAL.  EACH OF BORROWER  AND LENDER  HEREBY
IRREVOCABLY  WAIVES ALL  RIGHTS TO TRIAL BY JURY IN ANY  ACTION,  PROCEEDING  OR
COUNTERCLAIM (WHETHER BASED UPON CONTRACT,  TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THE  OBLIGATIONS,  THE TRANSACTION  DOCUMENTS,  THE  DEBTOR-CREDITOR
RELATIONSHIP OF BORROWER AND LENDER OR THE ACTIONS OF LENDER IN THE NEGOTIATION,
ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.

     SECTION 8.18. Execution in Counterparts.  This Agreement may be executed in
any number of counterparts, each of which when so executed shall be deemed to be
an original and all of which when taken  together  shall  constitute one and the
same Agreement.

                                   ARTICLE IX
                            ENVIRONMENTAL PROVISIONS

     SECTION 9.01. Definitions. For the purposes of this Article IX, the
following terms shall have the following meanings:

          "Business"  is defined as the  business  and  operations  conducted by
Borrower in connection with the Real Property Collateral.

          "Environmental Obligations" is defined in Section 9.07 hereof.

          "Expenses" is defined in Section 9.05 hereof.

          "Hazardous  Materials"  means  any  (a)  asbestos  in any  form,  urea
formaldehyde  foam  insulation,  transformers  or other  equipment which contain
dielectric fluid containing  levels of  polychlorinated  byphenyls or radon gas;
(c) any chemical, material or substance defined as or included in the definition
of "hazardous substances", "hazardous wastes", "hazardous materials", "extremely
hazardous waste",  "restricted  hazardous waste", "toxic substances" or words of
similar import under any applicable Hazardous Materials Laws.

          "Hazardous Materials Claims" means any enforcement,  cleanup, removal,
remedial or other  governmental  or regulatory  demand,  actions,  agreements or
orders  threatened,  instituted,  pending or completed pursuant to any Hazardous
Materials  Laws,  together with any claims made or threatened by any third party
against  any  of  Borrower,   Lender  or  any  Collateral  relating  to  damage,
contribution,  cost recovery,  compensation,  loss or injury  resulting from the
presence, release or discharge of any Hazardous Materials.


                                       47
<PAGE>

          "Hazardous Materials Laws" means the following Federal laws, and their
implementing regulations,  as well as any amendments to such laws, and all State
and local laws and  ordinances  which apply to the Real Property  Collateral and
which  regulate the same subject  matter:  (a) the  Comprehensive  Environmental
Response,  Compensation and Liability Act (CERCLA), 42 USC 9601 et seq.; (b) the
Solid  Waste  Disposal  Act,  42  USC  6901  et  seq.,  including  the  Resource
Conservation and Recovery Act (RCRA) and the laws governing  Underground Storage
Tanks;  (c) the  Toxic  Substances  Control  Act  (TSCA),  15 USC  2601 et seq.,
including  those  provisions  governing  use  and  disposal  of  Polychlorinated
Biphenyls (PCBs); (d) the Hazardous Materials  Transportation Act (HMTA), 49 USC
1801,  et seq.;  (e) the Federal  Insecticide,  Fungicide  and  Rodenticide  Act
(FIFRA),  7 USC 136 et seq.;  (f) those  portions of the Clean Air Act governing
toxic air emissions,  42 USC 7401 et seq.; (g) those portions of the Clean Water
Act governing  toxic water  pollutants and oil spills,  33 USC 1251 et seq.; (h)
the Emergency Planning and Community  Right-to-know Act (EPCRA, SARA Title III),
42 USC 11001 et seq.;  and (i) those  portions  of the  Occupational  Safety and
Health Act (OSHA)  governing worker safety with respect to hazards from chemical
substances,  including requirements for Material Safety Data Sheets, 29 USC 651,
et seq.

          "Remedial Work" is defined in Section 9.04 hereof.

          "Tenant"  means any  tenant  under any  lease or  occupancy  agreement
affecting any part of the Real Property Collateral.

     SECTION 9.02.  Representations  and Warranties.  Borrower hereby represents
and warrants  that,  to the best of its knowledge  after due inquiry,  except as
otherwise  specifically  disclosed to Lender in a writing dated the date hereof:
(a) except as described on Schedule 9.02 hereto,  no Hazardous  Materials  exist
on, under or about any of the  Collateral  or  Borrower's  business  premises in
violation of any Hazardous  Materials Laws, to the  satisfaction of the relevant
government  agency that enforces such laws,  (b) the Business is and has been in
compliance  with  all  Hazardous  Materials  Laws,  to the  satsifaction  of the
relevant  government  agency  that  enforces  such laws,  (c)  Borrower  has not
received  any  notice  of,  and to the best  knowledge  of  Borrower  after  due
investigation,  there are no existing or threatened  Hazardous Materials Claims,
(d) all Hazardous  Materials  generated in connection  with the Business are and
have been  transported  and  disposed of on or off-site in  compliance  with all
Hazardous  Materials Laws, to the satsifaction of the relevant government agency
that enforces such laws, and (e) no storage tanks are or have been located on or
under the Collateral within the last five years.


                                       48
<PAGE>

     SECTION 9.03. Covenants.  Until  it  has  satisfied  and   discharged   all
Obligations, Borrower shall (or shall cause its Affiliates to, as  the  case may
be):

          A. Compliance with Laws. Comply with all Hazardous Materials Laws, to
the satisfaction of the relevant government agency that enforces such laws.

          B. Presence of Materials.  Without  limiting the generality of Section
9.02  hereof,  except where done in  compliance  with all  applicable  Hazardous
Materials  Laws, not install,  use,  generate,  manufacture,  store,  release or
dispose of, nor permit the installation,  use, generation,  storage,  release or
disposal of Hazardous  Materials on, under or about any Collateral or Borrower's
business  premises,  nor  transport  or permit the  transportation  of Hazardous
Materials to or from any Collateral or Borrower's business premises.

          C. Notification. Promptly advise  Lender in writing of (i) any and all
Hazardous Materials Claims, (ii) Borrower's discovery of any release,  discharge
or disposal of any Hazardous Materials on, under or about any Collateral,  (iii)
Remedial Work taken by Borrower in response to any Hazardous Materials on, under
or about any Collateral or to any Hazardous  Materials  Claims,  (iv) Borrower's
discovery of any release,  discharge or disposal of any Hazardous  Materials on,
under or about any real property adjoining or in the vicinity of any Collateral,
or (v) Borrower's  discovery of any occurrence or condition on any Collateral or
any real  property  adjoining  or in the vicinity of any  Collateral  that could
cause  any  Collateral  to be  subject  to any  restrictions  on the  ownership,
occupancy, transferability or use under any Hazardous Materials Laws.

          D. Environmental Condition. Promptly provide Lender with copies of all
reports,   analyses,   notices,   licenses,    permits,    approvals,    orders,
correspondences  or  other  written  materials  relating  to  the  environmental
condition of any Collateral or Hazardous Materials Claims promptly upon receipt,
completion or delivery of such materials.

          F. Tanks.  Not  install  or  allow  to  be  installed  any  additional
underground tanks on any Collateral.

          G. Liens. Not create or permit to continue in existence any  lien upon
any Collateral imposed pursuant to any Hazardous Materials Laws.

     SECTION 9.04. Borrower's  Remedial Work.  Borrower shall  undertake any and
all   remedial   work  ("Remedial  Work")  (i)  required   by  any  governmental
authority(ties) in connection with any Hazardous Materials Claims instituted  or



                                       49
<PAGE>


completed by such  governmental  authority(ies)  or (ii) reasonably  required to
respond to any other Hazardous Materials Claims; provided however, that Borrower
shall  undertake  such  Remedial  Work  in  good  faith  so as to  minimize  any
impairment  to Lender's  security  under the Loan  Documents.  All Remedial Work
shall be  conducted  (a) in a diligent  and timely  fashion;  (b)  pursuant to a
detailed  written plan for the Remedial  Work  approved by any public or private
agencies  or  persons  from  which  such  approval  is  required;  (c) with such
insurance coverage pertaining to liabilities arising out of the Remedial Work as
is then customarily  maintained by companies similarly situated to Borrower with
respect to such  activities;  and (d) only  following  receipt  of any  required
permits,  licenses or approvals.  Borrower shall submit to Lender, promptly upon
receipt  or  preparation,  copies  of any and all  reports,  studies,  analyses,
correspondence,  governmental  comments or approvals,  proposed removal or other
Remedial Work contracts and similar information prepared or received by Borrower
in  connection  with any Remedial  Work or Hazardous  Materials  relating to any
Property Collateral.  All costs and expenses of such Remedial Work shall be paid
by Borrower,  including  the charges of the Remedial  Work  contractors  and any
consulting environmental engineer, any taxes or penalties assessed in connection
with the  Remedial  Work and  Lender's  reasonable  fees  and  costs  (including
Attorneys'  Fees and consultant  fees) incurred in connection with monitoring or
review  of  such  Remedial  Work.  Lender  shall  have  the  right,  but not the
obligation,  to join and  participate  in, as a party if Lender so  elects,  any
legal  proceedings  or  actions  initiated  in  connection  with  any  Hazardous
Materials Claims.

     SECTION 9.05. Indemnity. Borrower shall protect, defend, indemnify and hold
Lender, and its directors, officers, employees and agents, and any successors to
any of Lender's  interests  in the  Obligations  or any  portion  thereof or any
interest  therein,  and any Person who acquires any  Collateral at a foreclosure
sale or otherwise through the exercise of Lender's rights and remedies under the
Transaction Documents, and any successors to any such Person, and all directors,
officers, employees and agents of all of the aforementioned indemnified parties,
harmless from and against any and all claims, liabilities, obligations, damages,
losses,  fines,  penalties,  judgments,  awards,  costs and expenses  (including
attorneys' fees and costs and expenses of  investigation)  which arise out of or
relate  in any way to any  Hazardous  Materials  Claims  or any  use,  handling,
production,  transportation,  disposal,  release  or  storage  of any  Hazardous
Materials  in,  under or on any  Collateral  or  Borrower's  business  premises,
whether by  Borrower  or by any Tenant or any other  Person,  including  (a) all



                                       50
<PAGE>

foreseeable and all unforeseeable  consequential  damages directly or indirectly
arising out of (i) Hazardous Materials Claims or the use,  generation,  storage,
discharge or disposal of Hazardous Materials by any Borrower, any prior owner or
operator of any Collateral or Borrower's  business premises,  or the business or
operations of Borrower,  or any Person on or about any  Collateral or Borrower's
business  premises;  (ii)  any  residual  contamination  affecting  any  natural
resource or the  environment;  (iii) any exercise by Lender of any of its rights
and remedies  hereunder;  and (iv) Lender's  reliance on any  representation  or
warranty  made  herein or in any  certificate  delivered  after the date  hereof
pursuant  hereto,  if such  representation  or warranty  proves to be materially
false or  misleading;  and (b) the costs of any  required or  necessary  repair,
cleanup,  closure or  detoxification  of any  Collateral or Borrower's  business
premises and the  preparation of any closure or other required  plans.  All such
costs,  damages,  claims and expenses heretofore described and/or referred to in
this Section 9.05 are  hereinafter  referred to as "Expenses".  In the event any
Hazardous  Material  is  caused  to be  removed  from any of the  Collateral  or
Borrower's business premises by Borrower, Lender or any other Person, the number
assigned by the Environmental  Protection  Agency to such Hazardous  Material or
any similar identification shall be solely in the name of Borrower, and Borrower
shall assume any and all liability for such removed Hazardous Material.

     SECTION 9.06.  Remedies  Upon  Default.  In addition to any other rights or
remedies Lender may have under this Agreement, at law or in equity, in the event
that:  (i) Borrower  shall fail timely to comply with any of the  provisions  of
this  Article IX;  (ii) any  representation  or  warranty  made herein or in any
certificate  delivered  after  the date  hereof  pursuant  hereto  proves  to be
materially false or misleading;  or (iii) Borrower changes or alters the present
use of any  Collateral  or Borrower's  business  premises in a manner which will
result in the presence of Hazardous  Materials on any  Collateral  or Borrower's
business  premises at a level which may increase  the  potential  liability  for
Hazardous Materials Claims, then, in such event Lender may, after (a) delivering
written notice to Borrower,  which notice specifically states that Borrower have
failed to comply with the  provisions of this Article IX and (b) the  expiration
of the earlier to occur of (x) the thirty (30) day period  after  giving of such
notice or, if Borrower  commences cure during such thirty (30) day period,  such
longer  period as is  reasonably  required by Borrower to effect such cure using
reasonable  diligence,  but in any event no longer  than one  hundred and twenty
(120) days, or (y) the cure period, if any,  permitted under the applicable law,
rule,  regulation or order with which Borrower shall have failed to comply,  (i)


                                       51
<PAGE>

declare  an Event of Default  under  this  Agreement  and  exercise  any and all
remedies  provided for therein,  and/or (ii) do or cause to be done  whatever is
necessary to cause the Collateral or Borrower's business premises to comply with
all Hazardous Materials Laws and other applicable law, rule, regulation or order
and the cost thereof  shall  constitute  an Expense  hereunder  and shall become
immediately  due and payable  without  notice and with  interest  thereon at the
Default Interest Rate until paid.  Borrower shall give Lender and its agents and
employees  access to the  Collateral  or  Borrower's  business  premises for the
purpose of effecting such compliance and hereby  specifically  grant to Lender a
license,  effective upon expiration of the applicable cure period, if any, to do
whatever is necessary to cause the Collateral or Borrower's business premises to
so comply, including to enter the Collateral or Borrower's business premises and
remove therefrom any Hazardous Materials.

     SECTION 9.07.  Continuing  Obligations.  The  obligations set forth in this
Article  IX,  including   Borrower's   obligation  to  pay  Expenses   hereunder
(collectively,  the "Environmental Obligations"), are secured by the Collateral.
Notwithstanding  any term or provision  contained  herein or in the  Transaction
Documents,  the  Environmental  Obligations shall not be limited to the original
principal amount of the Term Loan. The  Environmental  Obligations shall survive
the  termination of this  Agreement,  the repayment of the  Obligations  and any
foreclosure,  deed in lieu of foreclosure  or similar  proceedings by or through
which  Lender or any  successors  or  assigns or any other  Person  bidding at a
foreclosure sale may obtain title to the Collateral or any portion thereof.

     SECTION  9.08.  Other Laws.  Nothing in this Article IX, and no exercise by
Lender of its rights or remedies under this Article IX or this Agreement,  shall
impair,  constitute  a waiver  of,  or in any way  affect  Lender's  rights  and
remedies with respect to Borrower under any Hazardous Materials Laws,  including
without  limitation,   contribution   provisions  or  private  right  of  action
provisions under such Hazardous Materials Laws.

     SECTION  9.09.  Security  Interest.  The  parties  acknowledge  that if any
indicia  of title is held by  Lender  under  the Loan  Documents,  it is held by
Lender solely to protect Lender's liens and security interests.


                                       52
<PAGE>

                                    ARTICLE X
                                CONVERSION RIGHTS

     SECTION 10.01. Conversion.

          A. Lender shall have the right, subject to the terms and provisions of
this ARTICLE X, at the option of the Lender,  (i) at any time,  to convert,  the
unpaid  principal  amount  of the Term  Loans or any  portion  thereof,  and any
accrued and unpaid  interest  on such Term Loans,  and (ii) at any time prior to
the Termination Date, to  simultaneously  advance and convert all or any portion
of the remaining  Commitment,  or after the Commitment Period, to simultaneously
advance and  convert an amount  equal to the amount of the  Commitment,  if any,
which was not  advanced  as a Term Loan during the  Commitment  Period (it being
acknowledged that this does not extend the Commitment  Period),  into fully paid
and non-assessable shares of Borrower Common Stock or any capital stock or other
securities  into which such Borrower Common Stock shall have been changed or any
capital stock or other  securities  resulting  from a  reclassification  thereof
("Shares").   Such  conversion  of  Term  Loans  and  simultaneous  advance  and
conversion  of the  Commitment  to Shares  shall be made at an amount  per Share
which is equal to the then Current Conversion Price, as further described below.
The Term Loans and Commitment  shall continue to be convertible,  in whole or in
part, even though Borrower may have given notice of prepayment of the Term Loans
or termination of the Commitment pursuant to Sections 2.01.D and 2.02.C, so long
as Lender's  notice of election to convert has been delivered to Borrower within
the Early Termination period.

          B. For convenience,  the conversion  pursuant to this Article X of all
or a portion of the principal amount of Term Loans (and/or of accrued and unpaid
interest if elected by Lender) and/or Commitment into Shares is herein sometimes
referred to as the "conversion" of the Term Loans/Commitment.

     SECTION 10.02. Mechanics of Conversion.

          A. Election and Payment.  The then unpaid principal amount of the Term
Loans/Commitment  (and/or,  in the event of a conversion  of any Term Loan,  any
accrued and unpaid  interest on such Term Loan) may be converted  by Lender,  in
whole or in part,  during normal  business  hours on any Business Day during the
period  such  election  can be made by written  notice of  Lender's  election to
convert the Term  Loans/Commitment or portion thereof, to Borrower at its office
designated pursuant to Section 8.06 hereof.  Payment of the Conversion Price for
the Shares  specified  in such  election  shall be made by applying an aggregate



                                       53
<PAGE>

amount of unpaid principal of the Term Loans/Commitment (and/or, in the event of
a  conversion  of any Term Loan,  any accrued  and unpaid  interest on such Term
Loan)  equal to the  amount  obtained  by  multiplying  (i) the number of Shares
specified in such  election by (ii) the then Current  Conversion  Price.  Lender
shall  thereupon  be entitled to receive the number of Shares  specified in such
election  (plus  cash in lieu of any  fractional  share as  provided  in Section
10.02.C hereof).

          B.  Effective  Date.  Each  conversion  of the  Term  Loans/Commitment
(and/or,  in the event of a conversion of any Term Loan,  any accrued and unpaid
interest on such Term Loan)  pursuant to Section  10.02.A hereof shall be deemed
to have been effected immediately prior to the close of business on the Business
Day on which  notice of Lender's  election to convert the Term  Loans/Commitment
shall have been given to Borrower as provided  in Section  10.02.A  hereof,  and
such conversion shall be at the Current Conversion Price in effect at such time.
On each such day that the conversion of the Term  Loans/Commitment  (and/or,  in
the event of a conversion of any Term Loan,  any accrued and unpaid  interest on
such Term Loan) is deemed  effected,  Lender  shall be deemed to have become the
holder of record of such Shares.

          C. Share  Certificates and Cash for Fractional  Shares. As promptly as
practicable after the conversion of the Term  Loans/Commitment  (and/or,  in the
event of a conversion of any Term Loan, any accrued and unpaid  interest on such
Term Loan), and in any event within five (5) Business Days thereafter,  Borrower
at its expense  (including the payment by it of any applicable  issue,  stamp or
other taxes, other than any income taxes) will cause to be issued in the name of
and delivered to Lender or as Lender may direct,  a certificate or  certificates
for the number of Shares to which Lender shall be entitled upon such  conversion
plus, in lieu of any  fractional  share to which such holder would  otherwise be
entitled,  cash in an amount equal to the same fraction of the Conversion Price.
Lender shall return to Borrower the original  promissory  note on  conversion of
all Term Loans and termination of the Commitment.

          D. Payment of Accrued  Interest.  Within five (5) Business  Days after
receipt  of notice of  Lender's  election  to  convert  all or a portion  of the
principal  amount of any Term Loan under Section 10.02.A  hereof,  Borrower will
pay to Lender any unpaid interest, accrued to the date of conversion of the Term
Loan, on the principal amount so converted, except to the extent that the amount
of such interest has also been converted into Shares.


                                       54
<PAGE>

     SECTION 10.03. Current Conversion Price.

          The term  "Conversion  Price"  shall mean  initially  $7.00 per Share,
subject to adjustment  as set forth in Section  10.04 hereof.  The term "Current
Conversion  Price" as used herein shall mean the Conversion  Price,  as the same
may be  adjusted  from time to time as  hereinafter  provided,  in effect at any
given time. In determining  the Current  Conversion  Price,  the result shall be
expressed  to the nearest  $0.01,  but any such lesser  amount  shall be carried
forward  and shall be  considered  at the time of (and  together  with) the next
subsequent  adjustment  which,  together  with  any  adjustments  to be  carried
forward, shall amount to $0.01 per Share or more.

     SECTION 10.04. Adjustment  of Conversion  Price. The Conversion Price shall
be subject to adjustment, from time to time, as follows:

          A. Adjustments for Stock Dividends,  Recapitali zations,  Etc. In case
Borrower  shall,  after  August 26,  1996,  (i) pay a stock  dividend  or make a
distribution  (on or in respect of its Borrower  Common  Stock) in shares of its
Borrower  Common Stock,  (ii) subdivide the  outstanding  shares of its Borrower
Common Stock,  (iii) combine the outstanding shares of its Borrower Common Stock
into a smaller number of shares, or (iv) issue by  reclassification of shares of
its Borrower Common Stock, any shares of capital stock of Borrower, then, in any
such case,  the Current  Conversion  Price in effect  immediately  prior to such
action shall be adjusted to a price such that if Lender were to convert the Term
Loans/Obligations  in full  immediately  after  such  action,  Lender  would  be
entitled to receive  the number of shares of capital  stock of  Borrower,  which
Lender  would  have  owned  immediately  following  such  action  had such  Term
Loans/Obligations been converted immediately prior thereto (with any record date
requirement  being deemed to have been  satisfied),  and, in any such case, such
Conversion Price shall thereafter be subject to further  adjustments  under this
Article X. An  adjustment  made  pursuant to this  subsection  (a) shall  become
effective  retroactively  immediately  after  the  record  date in the case of a
dividend  or  distribution  and shall  become  effective  immediately  after the
effective date in the case of a subdivision, combination or reclassification.

          B.  Adjustments  for Certain  Other  Distributions.  In case  Borrower
shall,  after August 26, 1996 fix a record date for the making of a distribution
to holders of its Borrower Common Stock (including any such distribution made in
connection  with a  consolidation  or merger in which Borrower is the continuing
corporation) of (i) assets,  (ii) evidences of indebtedness or other  securities
(except for its Borrower  Common  Stock) of Borrower or of any entity other than



                                       55
<PAGE>

Borrower,  or (iii) subscription rights,  options or warrants to purchase any of
the  foregoing  assets or  securities,  whether or not such  rights,  options or
warrants are  immediately  exercisable  (all such  distributions  referred to in
clauses  (i),  (ii) and (iii)  being  hereinafter  collectively  referred  to as
"Distributions  on  Common  Stock"),  Borrower  shall  set  aside  in an  escrow
reasonably  acceptable  to Lender,  and  suitably  invested  for the  benefit of
Lender,  the  Distribution  on  Common  Stock to which  Lender  would  have been
entitled  if  Lender  had  converted  all of the Term  Loans/Commitment  for the
Borrower  Common Stock  immediately  prior to the record date for the purpose of
determining  stockholders  entitled to receive such Distribution on Common Stock
and any such  Distribution  on Common Stock  (together  with any earnings  while
escrowed)  shall  thereafter  be  distributed  from out of such escrow to Lender
(immediately  upon  conversion) to the extent such  Distribution on Common Stock
relates to the portion of the Term Loans/Commitment then being converted.

          C.  Adjustments  for  Issuances of  Additional  Stock.  Subject to the
exceptions  referred to in Section 10.04.E hereof, in case Borrower shall at any
time or from time to time after the date hereof issue any  additional  shares of
the Borrower Common Stock ("Additional  Common Stock"),  for a consideration per
share  either (i) less than the then Current  Conversion  Price per share of the
Borrower  Common  Stock  immediately  prior to the  issuance of such  Additional
Common Stock, or (ii) without consideration,  then (in the case of either clause
(i) or (ii)), and thereafter  successively upon each such issuance,  the Current
Conversion  Price  shall  forthwith  be  reduced  to a price  equal to the price
determined by multiplying such Current Conversion Price by a fraction, of which

               (1) the  numerator  shall  be (i) the  number  of  shares  of the
          Borrower  Common Stock  outstanding  when the then Current  Conversion
          Price became  effective plus (ii) the number of shares of the Borrower
          Common  Stock which the  aggregate  amount of  consideration,  if any,
          received by Borrower upon all issuances of the Borrower  Common Stock,
          since the Current  Conversion  Price became  effective  (including the
          consideration,  if any,  received for such  Additional  Common  Stock)
          would purchase at the then Current  Conversion  Price per share of the
          Borrower Common Stock, and

               (2) the  denominator  shall be (i) the  number  of  shares of the
          Borrower Common Stock  outstanding  when the Current  Conversion Price
          became effective plus (ii) the number of shares of the Borrower Common
          


                                       56
<PAGE>

          Stock  issued  since the  Current Conversion  Price  became  effective
          (including the number of shares of such Additional Common Stock.

     provided,  however,  that  such  adjustment  shall  be  made  only  if such
     adjustment  results in a Current  Conversion  Price  less than the  Current
     Conversion  Price  in  effect  immediately  prior to the  issuance  of such
     Additional  Common Stock.  Borrower may, but shall not be required to, make
     any  adjustment  of the  Current  Conversion  Price if the  amount  of such
     adjustment  shall be less than one percent  (1%) of the Current  Conversion
     Price immediately  prior to such adjustment,  but any adjustment that would
     otherwise be required then to be made which is not so made shall be carried
     forward  and  shall be made at the  time of (and  together  with)  the next
     subsequent  adjustment  which,  together  with any  adjustments  so carried
     forward,  shall  amount to not less than one  percent  (1%) of the  Current
     Conversion Price immediately prior to such adjustment.

          D. Certain  Rules in  Applying  the  Adjustment  for  Additional Stock
Issuances. For purposes of any adjustment as provided in Section 10.04.C hereof,
the following provisions shall also be applicable:

               (i) Cash  Consideration.  In case of the  issuance of  Additional
Common Stock for cash, the consideration  received by Borrower therefor shall be
deemed to be the net cash  proceeds  received  by Borrower  for such  Additional
Common Stock after  deducting any commissions or other expenses paid or incurred
by  Borrower  for any  underwriting  of, or  otherwise  in  connection  with the
issuance of, such Additional Common Stock.

               (ii)  Non-Cash   Consideration.   In  case  of  the  issuance  of
Additional Common Stock for a consideration  other than cash, or a consideration
a part of which  shall be other than  cash,  (A) if value of  Additional  Common
Stock to be issued for such  consideration  is less than Fifty Thousand  Dollars
($50,000),  the amount of the consideration other than cash so received or to be
received by Borrower  shall be deemed to be the value of such  consideration  at
the time of its receipt by Borrower as  determined in good faith by the Board of
Directors of Borrower,  and (B) if value of Additional Common Stock to be issued
for such  consideration  is equal to or  greater  than  Fifty  Thousand  Dollars
($50,000),  the amount of the consideration other than cash so received or to be
received by Borrower  shall be deemed to be the value of such  consideration  at
the  time  of its  receipt  by  Borrower  as  determined  in  good  faith  by an
independent appraiser approved by the Lender; provided,  however, that where the
non-cash  consideration  consists of the cancellation,  surrender or exchange of
outstanding  obligations  of Borrower (or where such  obligations  are otherwise


                                       57
<PAGE>

converted into shares of the Borrower  Common Stock),  the value of the non-cash
consideration  shall be deemed to be the principal and unpaid interest amount of
the obligations canceled,  surrendered,  satisfied,  exchanged or converted.  If
Borrower  receives  consideration,  part or all of which  consists  of  publicly
traded  securities  (i.e.,  in  lieu  of  cash),  the  value  of  such  non-cash
consideration  shall be the aggregate market value of such securities  (based on
the latest reported sale price,  standard settlement) as of the close of the day
immediately preceding the date of its receipt by Borrower.

               (iii)  Options,  Warrants,  Convertibles,  Etc.  In  case  of the
issuance, whether by distribution or sale to holders of Borrower Common Stock or
to others,  by Borrower of (i) any security  that is  convertible  into Borrower
Common  Stock or (ii) any rights,  options or warrants to purchase  the Borrower
Common Stock (except as stated in Section 10.04.E hereof),  if inclusion thereof
in  calculating  adjustments  under this Section 10.04 would result in a Current
Conversion  Price  lower  than if  excluded,  Borrower  shall be  deemed to have
issued,  for the  consideration  described  below,  the  number of shares of the
Borrower Common Stock into which such convertible security may be converted when
first  convertible,  or the  number  of  shares  of the  Borrower  Common  Stock
deliverable  upon the  exercise of such rights,  options or warrants  when first
exercisable,  as the  case  may be  (and  such  shares  shall  be  deemed  to be
Additional   Common  Stock  for  purposes  of  Section  10.04.C   hereof).   The
consideration  deemed to be received by the Borrower at the time of the issuance
of such convertible  securities or such rights, options or warrants shall be the
consideration so received  determined as provided in Section 10.04.D(i) and (ii)
hereof after  deducting any  commissions  or other  expenses paid or incurred by
Borrower for any  underwriting of, or otherwise in connection with, the issuance
of such  convertible  securities  or rights,  options or warrants,  plus (x) any
consideration  or  adjustment  payment to be received by Borrower in  connection
with such conversion or, as applicable,  (y) the aggregate price at which shares
of the  Borrower  Common  Stock are to be  delivered  upon the  exercise of such
rights, options or warrants when first exercisable (or, if no price is specified
and such shares are to be  delivered  at an option  price  related to the market
value of the subject Borrower Common Stock an aggregate option price bearing the
same  relation to the market value of the subject  Borrower  Common Stock at the
time such rights,  options or warrants were  granted).  If,  subsequently,  such
convertible security,  rights,  options or warrants is converted or exercised or
the Term  Loans/Commitment is converted hereunder (1) such number of shares into
which such  convertible  security is convertible,  or which are deliverable upon
the  exercise of such  rights,  options or  warrants,  is  increased  or (2) the



                                       58
<PAGE>

conversion or exercise price of such convertible  security,  rights,  options or
warrants is decreased,  then the calculations  under the preceding two sentences
(and any  resulting  adjustment  to the Current  Conversion  Price under Section
10.04.C hereof) with respect to such convertible  security,  rights,  options or
warrants,  as the case  may be,  shall  be  recalculated  as of the time of such
exercise  or  conversion  but  giving  effect  to such  changes  (but  any  such
recalculation shall not result in the Current Conversion Price being higher than
that  which  would  be  calculated  without  regard  to such  issuance).  On the
expiration  or  termination  of such rights,  options or warrants,  or rights to
convert,  the Conversion  Price hereunder shall be readjusted (up or down as the
case may be) to such Current  Conversion  Price as would have been  obtained had
the  adjustments  made with  respect to the  issuance of such  rights,  options,
warrants or convertible  securities  been made upon the basis of the delivery of
only the number of shares of the Borrower  Common Stock actually  delivered upon
the exercise of such rights,  options or warrants or upon the  conversion of any
such  securities and at the actual  exercise or Conversion  Prices (but any such
recalculation shall not result in the Current Conversion Price being higher than
that which would be calculated without regard to such issuance).

               (iv)  Number of Shares  Outstanding.  The number of shares of the
Borrower  Common Stock has at the time  outstanding  shall exclude all shares of
the  Borrower  Common Stock then owned or held by or for the account of Borrower
but shall include the aggregate number of shares of Borrower Common Stock at the
time deliverable in respect of the convertible  securities,  rights, options and
warrants referred to in Section 10.04.D(iii) and 10.04.E hereof;  provided, that
to the extent that such rights,  options,  warrants or conversion privileges are
not  exercised,  such  shares of  Borrower  Common  Stock  shall be deemed to be
outstanding only until the expiration dates of the rights, warrants,  options or
conversion privileges or the prior cancellation thereof.

          E. Exclusions from the Adjustment  for Additional  Stock Issuances. No
adjustment of the Current Conversion Price under Section 10.04.C hereof shall be
made as a result of or in connection with:

               (i)  the  issuance   of   Shares  upon  conversion   of  the Term
Loans/Commitment;

               (ii) the  issuance  of  Borrower  Common  Stock to  officers  and
employees of Borrower or any Subsidiary, or the grant to or exercise by any such
persons of options to  purchase  Borrower  Common  Stock,  all  pursuant  to the



                                       59
<PAGE>

Borrower's stock  option and stock purchase  plans described on Schedule 10.04.E
hereto; or

               (iii) the  issuance  of  Borrower  Common  Stock  pursuant to any
convertible securities described on Schedule 10.04.E hereto.

To the extent that the  issuance (or deemed  issuance) of Borrower  Common Stock
shall not result in any adjustment of the Current  Conversion  Price pursuant to
the provisions of this Section 10.04.E then such Borrower Common Stock shall not
be taken into account for purposes of determining  any  adjustment  under clause
(B) of Section 10.04.C hereof.

          F. Officer's  Certification.  Whenever the Current Conversion Price is
adjusted as provided in this Section  10.04,  Borrower will promptly  deliver to
Lender a certificate of its Chief Accounting  Officer or Chief Financial Officer
setting forth the Current  Conversion  Price as so adjusted,  the computation of
such  adjustment  and a  brief  statement  of  the  facts  accounting  for  such
adjustment.  Upon the request of Lender,  Borrower shall promptly (in any event,
within  thirty  (30) days of such  request)  obtain a  certificate  of a firm of
independent public  accountants of recognized  national standing selected by the
Board of  Directors  of Borrower  (who may be the regular  auditors of Borrower)
(the "Accountant  Certificate") setting forth the Current Conversion Price as so
adjusted,  the computation of such adjustment and a brief statement of the facts
accounting  for  such  adjustment,  and  will  mail  to  Lender  a copy  of such
Accountant   Certificate.   The   determination  set  forth  in  the  Accountant
Certificate shall be final and binding on both parties. If there is no change in
the  amount  of the  original  proposed  adjustment  or if the  change  (whether
increased or decreased) is less than five percent (5%) of the original  proposed
adjustment,  the cost of such Accountant Certificate shall be for the account of
Lender.  In all other events,  the cost of such Accountant  Certificate shall be
for the account of Borrower.

          G. Antidilution  Adjustments under other Securities.  Without limiting
any other  rights  available  hereunder to Lender,  if there is an  antidilution
adjustment  (x) under any security  which is  convertible  into Borrower  Common
Stock  whether  issued prior to or after the date hereof or (y) under any right,
option or warrant to purchase  Borrower  Common Stock whether issued prior to or
after the date  hereof  which (in the case of clause  (x) or (y))  results  in a
reduction  in the  exercise or  purchase  price with  respect to such  security,
right,  option or  warrant or  results  in an  increase  in the number of shares
obtainable  under such security,  right,  option or warrant,  then an adjustment


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<PAGE>

shall be made  under  this  Section  10.04.G  to the  Current  Conversion  Price
hereunder.  Any such adjustment under this Section 10.04.G shall be whichever of
the following  results in a lower Current  Conversion  Price: (A) a reduction in
the Current Conversion Price equal to the percentage  reduction in such exercise
or purchase price with respect to such security, right, option or warrant or (B)
a  reduction  in the  Current  Conversion  Price  which will  result in the same
percentage  increase in the number of Shares  available  under this Article X as
the percentage  increase in the number of shares  available under such security,
right,  option or warrant.  Any such adjustment under this Section 10.04.G shall
only be made if it would result in a lower  Current  Conversion  Price than that
which  would  be  determined  pursuant  to  any  other  antidilution  adjustment
otherwise required under this Article X as a result of the event or circumstance
which  triggered  the  adjustment  to the  security,  right,  option or  warrant
described  in clause  (x) or (y) above  (and if any such  adjustment  is so made
under this Section 10.04.G,  then such other antidilution  adjustment  otherwise
required  under  this  Article X shall not be made as a result of such  event or
circumstance).

          H. Other Adjustments. In case any event shall occur as to which any of
the provisions of this Section 10.04 are not strictly applicable but the failure
to  make  any  adjustment  would  not  fairly  protect  the  conversion   rights
represented  hereby in accordance  with the essential  intent and  principles of
this Section 10.04,  then, in each such case,  Borrower shall make an adjustment
consistent  with the intent and  principles  of this  Section  10.04,  provided,
however,  that any such adjustment under this Section 10.04.H shall only be made
if it would  result in a lower  Current  Conversion  Price.  Upon the request of
Lender,  Borrower shall promptly (in any event,  within thirty (30) days of such
request) appoint a firm of independent public accountants of recognized national
standing  selected by the Board of Directors of Borrower (who may be the regular
auditors of Borrower),  which shall give their opinion upon the  adjustment,  if
any, on a basis consistent with the essential intent and principles  established
in this Section 10.04,  necessary to preserve,  without dilution, the conversion
rights represented hereby. Upon receipt of such opinion,  Borrower will promptly
mail copies thereof to Lender and shall make the adjustments  described therein.
If there is no change in the amount of the original  proposed  adjustment  or if
the change  (whether  increased or  decreased) is less than five percent (5%) of
the original  proposed  adjustment,  the cost of such  opinion  shall be for the
account of Lender. In all other events, the cost of such Accountant  Certificate
shall be for the account of Borrower.

          I. Meaning of "Issuance". References in this Agreement to "issuances"
of  stock  by Borrower  include issuances  by Borrower  of  previously  unissued



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<PAGE>

shares and  issuances  or other  transfers  by Borrower  of  treasury  stock not
specifically identified on Schedule 10.04(E).

     SECTION 10.05. Issuer's Consolidation or Merger.

          Without  limiting  Section 5.02 hereof,  if Borrower shall at any time
consolidate  with or merge into another  corporation  (where Borrower is not the
continuing  corporation after such merger or  consolidation),  or Borrower shall
sell,  transfer or lease all or  substantially  all of its  assets,  or Borrower
shall change its Shares into  property  other than capital  stock,  then, in any
such case, Lender shall thereupon (and thereafter) be entitled to receive,  upon
the conversion of the Term loans/Commitment, the securities or other property to
which  (and upon the same terms and with the same  rights as) Lender  would have
been  entitled  if  such  conversion  had  occurred  immediately  prior  to such
consolidation  or merger,  such sale of assets or such  change  (with any record
date  requirement  being  deemed to have been  satisfied),  and such  conversion
rights shall thereafter continue to be subject to further adjustments under this
Article X. Borrower shall take such steps in connection with such  consolidation
or  merger,  such sale of assets or such  change as may be  necessary  to assure
Lender that the provisions  hereof shall thereafter be applicable in relation to
any  securities or property  thereafter  deliverable  upon the conversion of the
Term  Loans/Commitment,  including obtaining a written obligation to supply such
securities or property upon such conversion and to be so bound hereby.

     SECTION 10.06. Notice to Lender.

          In case at any time

          (i) Borrower  shall take any action which would  require an adjustment
     in the Current Conversion Price pursuant to Section 10.04.A, C or G; or

          (ii) Borrower shall  authorize the granting to the holders of Borrower
     Common Stock of any  Distributions  on Common Stock as set forth in Section
     10.04.B; or

          (iii) there shall be any reorganization, reclassification or change of
     Borrower Common Stock, or any  consolidation or merger to which Borrower is
     a party and for which approval of any stockholders of Borrower is required,
     or any sale, transfer or lease of all or substantially all of the assets of
     Borrower; or

          (iv) there shall be a voluntary or involuntary dissolution,
     liquidation or winding-up of Borrower;


                                       62
<PAGE>

then, in any one or more of such cases,  Borrower  shall give written  notice to
Lender,  not less than twenty (20) days before any record date or other date set
for  definitive  action,  of  the  date  on  which  such  action,  distribution,
reorganization,  reclassification, change, sale, transfer, lease, consolidation,
merger, dissolution, liquidation or winding-up shall take place, as the case may
be. Such notice shall also set forth such facts as shall  indicate the effect of
any such  action  (to the  extent  such  effect may be known at the date of such
notice) on the  Current  Conversion  Price and the kind and amount of the shares
and other  securities  and  property  deliverable  upon  conversion  of the Term
Loans/Commitment.  Such  notice  shall  also  specify  any date as of which  the
holders of Borrower  Common Stock of record shall be entitled to exchange  their
Borrower Common Stock for securities or other property deliverable upon any such
reorganization,  reclassification, change, sale, transfer, lease, consolidation,
merger, dissolution, liquidation or winding-up, as the case may be.

                                   ARTICLE XI
                            REPRESENTATIONS OF LENDER

     SECTION 11.01.  Representations  of Lender.  Lender  hereby  represents and
warrants to Borrower as follows:

          A. Lender is an Accredited  Investor as defined  under the  Securities
Act of 1933, as amended (the "Act").  Lender has been provided with and reviewed
the SEC Filings and has made its own independent due diligence  investigation of
Borrower;  provided,  however,  that such investigation  shall not impact in any
manner Borrower's  responsibility  for the  representations  and warranties made
hereunder.  Lender is  qualified  to  analyze  the  merits of an  investment  in
Borrower.

          B. Lender  acknowledges that the Term Loans and any Shares received by
it upon conversion of the Term Loans and/or Commitments have not been registered
under the Act and may not be transferred,  assigned or resold unless  registered
pursuant  to the Act or  pursuant  to an  exemption  under  the  Act;  provided,
however,   that  the  foregoing  shall  not  impact  in  any  manner  Borrower's
obligations under the Act.

          C. Lender has entered into this  Agreement,  issued the Commitments to
make the Term Loans and acquired the Conversion  rights hereunder without a view
towards sale or distribution thereof;  provided,  however, that, as set forth in
Section 8.03 hereof, the distribution of any Shares acquired after Conversion of
the Term Loans and/or Commitments shall be in the sole control and discretion of
Lender.


                                       63
<PAGE>

          D. On each date of  Conversion  of the Term Loans  and/or  Commitments
pursuant  to Article X hereof,  the  representations  and  warranties  of Lender
contained in this Article XI shall be deemed repeated.

     IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be
duly executed as of the day and year first above written.

                                       COVOL TECHNOLOGIES, INC.


                                       By:
                                           -------------------------------------
                                       Name:
                                             -----------------------------------
                                       Title:
                                              ----------------------------------

                                       PACIFICORP FINANCIAL SERVICES, INC.


                                       By:
                                           -------------------------------------
                                       Name:
                                             -----------------------------------
                                       Title:
                                              ----------------------------------


                                       64
<PAGE>

                                 Exhibit 1.01.TN


                                 PROMISSORY NOTE


U.S. $5,000,0000                                      Dated as of March 20, 1997
or such amount thereof
as has been advanced

          FOR VALUE  RECEIVED,  the  undersigned,  COVOL  TECHNOLOGIES,  INC., a
Delaware  corporation  ("Borrower"),  PROMISES TO PAY to the order of PACIFICORP
FINANCIAL SERVICES, INC., an Oregon corporation ("Lender"), the principal amount
of Five  Million  Dollars  ($5,000,000),  or such  amount  thereof  as has  been
advanced,  together with interest  thereon at the Interest Rate (as  hereinafter
defined)  (collectively,  the "Term  Loan") from the date  hereof  until paid in
full,  all in accordance  with the terms of the Loan  Agreement (as  hereinafter
defined) and this Note.

          For purposes of this Note, the following terms shall have the meanings
set forth below.  Capitalized  terms used but not otherwise defined herein shall
have the meanings ascribed thereto in the Loan Agreement.

          "Default  Interest Rate" means a rate per annum equal to the lesser of
(a) the highest rate  allowed by law, or (b) the sum of the  Interest  Rate plus
three percent (3%).

          "Interest  Rate"  means,  for any day,  a rate per annum  equal to the
lesser of (a) the highest rate allowed by law, or (b) the sum of (i) the rate of
interest publicly  announced by Morgan Guaranty Trust Company of New York in New
York City from time to time as its "prime  rate" and (ii) two  percent  (2%) per
annum.

          "Loan  Agreement"  means the Loan and Security  Agreement  dated as of
even date  herewith  by and  between  Borrower  and  Lender,  as the same may be
amended, supplemented or otherwise modified from time to time.

          Borrower  shall pay interest on the unpaid  principal  balance of this
Note from the date hereof  until the  repayment  in full thereof at the Interest
Rate.  Interest shall be calculated  based on a 365/366-day  year and the actual
number of days elapsed,  and shall be compounded monthly.  Principal and accrued
and unpaid interest  thereon,  shall be due and payable on the Termination Date,
or on such earlier  date as such sum shall  become due and payable  hereunder or
under the Loan  Documents  by  virtue of  acceleration  in  accordance  with the
provisions hereof or of the Loan Agreement.


                                        1
<PAGE>

          In no  contingency  or event  whatsoever  shall  the rate or amount of
interest  paid by the  Borrower  under  this  Note  exceed  the  maximum  amount
permissible  under the law which a court of competent  jurisdiction  shall, in a
final  determination,  deem  applicable  hereto.  In the event  that such  court
determines  that Lender has received  interest  under this Note in excess of the
maximum  amount  permitted by such law (i) Lender shall apply such excess to any
unpaid  principal  owed by  Borrower  to Lender or, if the amount of such excess
exceeds the unpaid balance of such principal,  Lender shall promptly refund such
excess interest to Borrower and (ii) the provisions of this Note shall be deemed
amended to provide for such  permissible  rate.  All sums paid,  or agreed to be
paid, by Borrower  which are, or hereafter may be construed to be,  compensation
for the use, forbearance or detention of money shall, to the extent permitted by
applicable law, be amortized,  spread and allocated  throughout the full term of
such indebtedness until the indebtedness is paid in full.

          Both  principal and interest are payable in United  States  Dollars in
immediately  available funds. All principal,  interest and late charges shall be
paid to Lender pursuant to the payment provisions in the Loan Agreement.

          The terms and provisions of the Loan Agreement are hereby incorporated
herein by this  reference,  and reference is made to the Loan  Agreement for the
basic terms of the Term Loan. The Loan Agreement,  among other things,  contains
provisions  for (i)  acceleration  of the maturity  hereof upon the happening of
certain stated events and (ii)  prepayments on account of principal hereof prior
to the maturity hereof upon the terms and conditions  therein  specified,  which
prepayments  shall be applied by Lender to payment of principal on the Term Loan
in inverse order of maturity.

          Time is of the essence hereof,  and upon the occurrence of an Event of
Default then this Note and any note(s) or other  instrument(s) that may be taken
in renewal or extension of all or any part of the indebtedness  evidenced hereby
or in replacement of this Note shall, at Lender's option, become immediately due
and payable without any further  presentment,  demand,  protest or notice of any
kind, and thereafter  interest shall continue to accrue at the Default  Interest
Rate.

          Furthermore,  upon the occurrence of an Event of Default, Lender shall
have all of the rights and remedies  granted to Lender under the Loan  Agreement
and under all other Loan Documents, and notwithstanding anything to the contrary
contained herein, any amount of principal which is not paid when due (whether at


                                        2
<PAGE>

stated  maturity,  by  acceleration  or  otherwise)  shall bear  interest at the
Default Interest Rate from the date due until paid.

          This  Note  shall  bind  and  inure  to the  benefit  of the  Lender's
successors and permitted assigns; provided,  however, that Lender may not assign
this  Note  without  Borrower's  prior  written  consent,   and  any  prohibited
assignment shall be absolutely void; provided, further, that such prohibition on
assignment  shall in no event  apply to the  assignment  by Lender of all or any
portion of its rights hereunder after the occurrence of an Event of Default.

          Borrower  hereby waives  presentment  for payment,  demand,  notice of
dishonor  and  protest of this Note and  further  agrees that this Note shall be
deemed to have been made under and shall be governed by the laws of the State of
Oregon  in  all  respects,  including  matters  of  construction,  validity  and
performance,  and that none of its terms or provisions  may be waived,  altered,
modified or amended except as Lender may consent  thereto in writing duly signed
by Lender or its  authorized  agent.  No  failure to  exercise,  and no delay in
exercising,  any rights hereunder on the part of the holder hereof shall operate
as a waiver of such rights.

          This Note is  secured  by the  Collateral  under the terms of the Loan
Agreement  and is  subject  to the  terms and  conditions  and  entitled  to the
benefits of the Loan Agreement and the other Loan Documents.

          This Note shall be binding upon and inure to the benefit of the Lender
and its respective heirs, executors,  administrators,  personal  representatives
and permitted successors and assigns.

          WAIVER OF JURY TRIAL: THE UNDERSIGNED  HEREBY  IRREVOCABLY  WAIVES ALL
RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED
UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THE OBLIGATIONS,
THE  TRANSACTION  DOCUMENTS,  THE  DEBTOR-CREDITOR  RELATIONSHIP OF BORROWER AND
LENDER OR THE ACTIONS OF LENDER IN THE NEGOTIATION, ADMINISTRATION,  PERFORMANCE
OR ENFORCEMENT THEREOF.

     IN WITNESS WHEREOF,  Borrower has caused this Note to be executed as of the
date and year first above written.

                                       COVOL TECHNOLOGIES, INC.


                                       By:
                                           -------------------------------------
                                       Name:
                                             -----------------------------------
                                       Title:
                                              ----------------------------------


                                        3