UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from ___________________ to _______________
Commission file number 0-27803
COVOL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 87-0547337
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
3280 North Frontage Road, Lehi, Utah 84043
(Address of principal executive offices (Zip Code)
(801) 768-4481
(Registrant's telephone number, including area code)
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Stock Amount Outstanding
$.001 par value Common Stock 7,734,123 Shares of Common Stock
at December 31, 1996
<PAGE>
COVOL TECHNOLOGIES, INC.
TABLE OF CONTENTS
Page No.
Part I - Financial Information
Item 1. Consolidated Financial Statements
Balance Sheets................................3
Statements of Operations......................4
Statements of Cash Flows......................5
Notes to Financial Statements.................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 9
Part II. - Other Information
Item 1. Legal Proceedings.....................................13
Item 2. Changes in Securities.................................13
Item 3. Defaults upon Senior Securities.......................14
Item 4. Submission of Matters to a Vote
of Security Holders..........................14
Item 5. Other Information.....................................14
Item 6. Exhibits and Reports on Form 8-K......................14
2
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of As of
September 30, December 31,
1996 1996
------------------ ------------------
ASSETS (Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 490,106 $ 949,289
Receivables 77,744 87,370
Inventories (Notes 3) 162,757 217,234
Notes receivable - related parties, current 3,733 3,132
Prepaid expenses and other current assets 44,733 51,243
------------------ ------------------
Total current assets 779,073 1,308,268
------------------ ------------------
Property, plant and equipment, net of accumulated depreciation 7,125,245 9,216,243
------------------ ------------------
Other assets:
Cash surrender value of life insurance 152,112 152,112
Notes receivable - related parties, non-current 700,000 700,000
Deposits and other assets 15,642 125,000
------------------ ------------------
Total other assets 867,754 977,112
------------------ ------------------
Total assets $ 8,772,072 $ 11,501,623
================== ==================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 2,183,278 $ 2,593,484
Accrued liabilities 333,936 461,050
Notes payable - current 958,086 621,946
Notes payable - related parties, current 786,000 1,220,310
------------------ ------------------
Total current liabilities 4,261,300 4,896,790
------------------ ------------------
Long-term liabilities:
Notes payable, non-current (Note 5) 150,980 2,247,680
Deferred compensation 212,612 215,377
------------------ ------------------
Total long-term liabilities 363,592 2,463,057
------------------ ------------------
Total liabilities 4,624,892 7,359,847
------------------ ------------------
Minority interest in consolidated subsidiaries 4,380,544 4,837,392
------------------ ------------------
Commitments (Note 8)
Stockholders' deficit (Note 6):
Common stock: $0.001 par value; authorized: 25,000,000
shares issued and outstanding: 7,610,373 at September
30, 1996 and 7,734,123 at December 31 1996 7,610 7,734
Common stock to be issued: 103,750 shares at September
30, 1996 and 85,000 at December 31, 1996 104 85
Capital in excess of par value 32,780,515 33,952,892
Capital in excess of par value - common stock to be issued 934,896 632,415
Accumulated deficit (21,196,476) (21,875,778)
Notes and interest receivable - related parties from issuance of
or collateralized by common stock (net of allowance)(Note 4) (7,580,071) (8,283,480)
Deferred compensation from stock options (5,179,942) (5,129,484)
------------------ ------------------
Total stockholders' deficit (233,364) (695,616)
------------------ ------------------
Total liabilities and stockholders' deficit $ 8,772,072 $ 11,501,623
================== ==================
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
3
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
December 31, December 31,
1995 1996
------------------ ------------------
Revenues:
<S> <C> <C>
Briquette sales $ 3,791 $ 104,147
------------------ ------------------
Total revenues 3,791 104,147
------------------ ------------------
Operating costs and expenses:
Cost of briquetting operations 0 364,580
Research and development 434,894 105,067
Selling, general and administrative 995,972 807,314
Compensation expense on stock options 112,021 312,959
Compensation expense on issuance of common stock 23,250 0
Write-up of note receivable 0 (725,000)
Minority interest in net losses of consolidated subsidiaries 0 (18,152)
------------------ ------------------
Total operating costs and expenses 1,566,137 846,768
------------------ ------------------
Operating loss (1,562,346) (742,621)
------------------ ------------------
Other income (expense):
Interest income 18,492 127,806
Interest expense (14,272) (65,876)
Other income 549 1,389
------------------ ------------------
Total other income 4,769 63,319
------------------ ------------------
Loss from continuing operations (1,557,577) (679,302)
Loss from discontinued operations (149,892) 0
------------------ ------------------
Net loss $ (1,707,469) $ (679,302)
================== ==================
Net loss per common share:
Loss per share from continuing operations $ (0.26) $ (0.09)
Loss per share from discontinued operations (0.02) 0.00
---------------- ----------------
Net loss per share (Note 2) $ (0.28) $ (0.09)
Weighted average shares outstanding 6,008,035 7,711,338
================= ================
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
4
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
December 31, December 31,
1995 1996
------------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (1,707,469) $ (679,302)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 38,026 51,346
Common stock issued for services 264,343 0
Write-up of note receivable - related party, collateralized
by common stock 0 (725,000)
Amortization of deferred compensation on stock options 112,021 312,959
Interest earned on notes receivable - related parties,
collateralized by commom stock 0 (79,909)
Loss applicable to minority interests in subsidiaries 0 (18,152)
Increase (decrease) from changes in assets and liabilities
of continuing operations:
Receivables (56,678) (9,626)
Inventories (42,125) (54,477)
Prepaid expenses and other current assets 3,586 (6,510)
Deposits and other assets 0 (109,358)
Accounts payable (271,758) 410,206
Accrued liabilities (143,012) 127,114
Deferred compensation 2,486 2,765
Discontinued operations noncash charges and working
capital changes 59,101 0
------------- -----------
Net cash used in operating activities (1,741,479) (777,944)
------------- -----------
Cash flows from investing activities:
Cash paid for property, plant and equipment (256,841) (2,142,344)
Payments of notes receivable - related parties 0 601
Increase in cash surrender value of life insurance (6,250) 0
Investing activities of discontinued operations (33,688) 0
------------- ----------
Net cash used in investing activities (296,779) (2,141,743)
------------- ----------
Cash flows from financing activities:
Proceeds from issuance of limited partnership interests in subsidiaries 0 475,000
Proceeds from issuance of notes payable 0 2,100,000
Proceeds from notes payable - related parties, collateralized by common stock 0 500,000
Payment of notes payable (7,618) (339,440)
Payment of notes payable - related parties (39,035) (65,690)
Payments from note receivable- related parties, collateralized by
common stock 140,000 101,500
Proceeds from issuance of common stock 2,337,172 560,000
Proceeds from of common stock to be issued 0 47,500
Financing activities of discontinued operations (452,039) 0
------------ ----------
Net cash provided by financing activities 1,978,480 3,378,870
------------ ----------
Net (decrease) increase in cash (59,778) 459,183
Total cash and cash equivalents, beginning of period: 1,291,166 490,106
Cash and cash equivalents, end of period
Continuing operations 837,840 949,289
Discontinued operations 393,548 0
------------ ----------
Total cash and cash equivalents, end of period 1,231,388 $ 949,289
============ ==========
Supplemental schedule of non-cash investing and financing activities:
Common stock issued for notes receivable $ 6,159,375 $ 0
============ ==========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
5
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
----------
1. Management Opinion:
In the opinion of management, the accompanying financial statements present
fairly the financial position of Covol Technologies, Inc. and Subsidiaries (the
Company) as of September 30, 1996 and December 31, 1996, the results of its
operations for the three months ended December 31, 1995 and December 31, 1996
and its cash flows for the three months ended December 31, 1995 and December 31,
1996. The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the Company's Annual Report included in Form 10-K
for the year ended September 30, 1996.
2. Loss Per Share Calculation
Primary average shares include only common shares outstanding. The computation
of fully diluted net loss per common share was antidilutive in each period for
which a net loss was presented; therefore, the amounts reported for primary and
fully diluted loss are the same for those periods.
3. Inventories
Inventories are stated at the lower of average cost or market, and consist of
coal fines available for sale and binder materials.
4. Change in Estimate of Fair Value of Note Receivable
During the three months ended December 31, 1996, the Company decreased the
allowance for impairment on the $5,000,000 face value note receivable from two
stockholders by $725,000. The decrease in the allowance was based upon a $3.63
per share increase in the Company's common stock that collateralizes the note
receivable. The estimate is subject to future fluctuations due to market
changes.
5. Convertible Debentures
In November of 1996, the Company issued convertible subordinated debentures in
the principal amounts of $300,000, $200,000 and $500,000 to Mr. Douglas M.
Kinney, Mr. Gordon L. Deane and the Douglas M. Kinney 1999 Retained Annuity
Trust, respectively. The convertible subordinated debentures accrue interest at
prime plus two percent (2%) with interest and principal payable in full on June
30, 1998. All or a portion of the unpaid principal due on the convertible
subordinated debentures is convertible into the Company's common stock. Through
a separate subscription agreement, the Company has granted piggy-back
registration rights to the investors for Company common stock issued upon
conversion of the convertible subordinated debentures. The Company has the right
to prepay the principal of the convertible subordinated debentures.
In December 1996, the Company entered into a Debenture Agreement and Security
Agreement with AJG Financial Services, Inc. an affiliate of Arthur J. Gallagher
("Gallagher"), whereby the Company borrowed $1,100,000, and may, under certain
circumstances, draw down an additional amount of up to $2,900,000 (for a total
borrowed amount of $4,000,000). In consideration for the loan of $1,100,000, the
Company issued a Convertible Subordinated Debenture accruing interest at 6% per
annum and maturing three years from its date of issuance (the "Subordinated
Debenture"). The interest and principal of the Subordinated Debenture is payable
on maturity. The Company does not have the right to prepay any portion of the
principal of the Subordinated Debenture, and the Company is required to prepay
the Subordinated Debenture if a change in control of the Company occurs. All or
a portion of the unpaid principal due on the Subordinated Debenture is
convertible into Company common stock.
6
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
----------
5. Convertible Debentures, continued
The Subordinated Debenture is subordinated and junior in right to all other
existing indebtedness of the Company which is not expressly pari passu with or
subordinated to the Subordinated Debenture. Finally, the Company has granted
piggy-back and demand registration rights to AJG Financial Services, Inc. for
the Company common stock issued upon conversion of the Subordinated Debenture.
6. Stockholders' Deficit
The table below presents the activity in stockholders' deficit from October 1,
1996 to December 31, 1996.
<TABLE>
<CAPTION>
Common Stock Common Stock to be issued Notes and interest
-------------------------- ---------------------------- receivable-related Deferred
parties from compens-
Capital in Capital in issuance of, or sation
excess of excess of Accumulated collateralized on stock
Shares Amount par value Shares Amount par value Deficit by, common stock options
-------- ------ ---------- ------ ------ ---------- ------------ ----------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1996 7,610,373 $7,610 $32,780,515 103,750 $104 $934,896 $(21,196,476) ($7,580,071) ($5,179,942)
Common stock issued for
cash received in a prior
period. 43,750 44 349,957 (43,750) (44) (349,956)
Cash received in payment on 101,500
notes receivable - related
parties from issuance of
common stock
Common stock issued for 80,000 80 559,920
cash, including exercise of
stock options and warrants
Common stock to be issued 25,000 25 47,475
for cash, including exercise of
stock options and warrants
Deferred compensation 262,500 (262,500)
related to the issuance of
stock options at below market
value to officers, directors,
employees and consultants
Amortization of deferred 312,958
compensation on stock
options
Interest earned on notes receivable - (79,909)
related parties from issuance
of or collateralized by
common stock
Write-up of notes receivable - (725,000)
related party
Net loss for the quarter (679,302)
ended December 31, 1996 ________ ______ _________ _______ ____ _________ ___________ ___________ __________
Balance at December
31, 1996 7,734,123 $7,734 $33,952,892 85,000 $85 $632,415 ($21,875,778) ($8,283,480) ($5,129,484)
========= ====== =========== ====== ==== ======== ============= ============ ===========
</TABLE>
7
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
----------
7. Subsequent Events
On January 2, 1997, the Company drew down $588,683 and on February 4, 1997 the
Company drew down an additional $1,313,514 of the available $2,900,000 under the
Debentures Agreement with AJG Financial Services, Inc. as described above. In
consideration for the amount drawn down, the Company issued Senior Debentures in
such amount accruing interest at prime plus two percent (2%) and maturing three
years from the date of issuance (the "Senior Debentures"). The Senior Debentures
arc collateralized by all real and personal property purchased by the Company
with the proceeds of the Senior Debentures. The proceeds of the Subordinated
Debentures and the Senior Debentures may be used to satisfy contractual
obligations of the Company, for working capital and to purchase equipment to be
used to construct coal briquetting facilities to be managed and/or sold by the
Company or affiliates of the Company.
8. Commitments
In connection with construction agreements entered into by the Company
in December, 1996, in order to assure the agreements would be considered binding
on the Company, the Company agreed to penalty clauses in the aggregate amount of
$3,012,000 if the Company fails to build the facilities. There can be no
assurance that the facilities will be built. In connection with licensing
agreements entered into by the Company, in December 1996, the Company entered
into indemnity agreements with a contractor which may result in a contingent
liability of up to $4,500,000 on or after June 2, 1998.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations
Three months ended December 31, 1996 compared to three months ended
December 31, 1995
Revenues
In the three months ended December 31, 1996, total revenues increased
by $100,356 to $104,147 from the $3,791 reported in the comparable period in
1995. The sale of briquettes is primarily attributable to production from the
briquetting facility located near Price, Utah (the "Utah Project").
Margins, Costs and Expenses
The Company's operating loss decreased to $679,302 for the first three
months of fiscal year 1997 from $1,707,469 loss reported in the comparable
period in fiscal year 1996 due largely to: a write- up of the note receivable
related to the sale of the Company's previously owned subsidiaries (discontinued
operations) in the amount of $725,000; a decrease in research and development
expenses of $329,827 due to the Company's focus on commercialization of its
technology through the construction and startup of its first full scale
briquetting facility; and a decrease in general, selling and administrative
expenses of $188,658 related principally to reductions in costs for outside
professional services and travel expenses. For a more detailed discussion of the
Company's operations, see the Company's Form 10-K for fiscal year ended
September 30, 1996.
Cost of briquetting operations for the three months ended December 31,
1996 was $364,580. No cost was incurred for briquetting operations in the three
months ended December 31, 1995. The cost for briquetting operations was
substantially more than the revenue generated for the sales of briquettes
because the amount includes costs for the continuing refinement and development
of the briquetting process and product. Compensation expense on stock options
increased $200,938, based upon amortization of deferred compensation during the
first quarter of fiscal year 1997. During the three months ended December 31,
1996 the Company underwent significant director and management changes. As an
enticement to key executives and directors, the Company granted options at
prices below market value. Compensation expense on such stock options was
$157,500 based upon the vesting of a portion of the options. For a more detailed
discussion of the Company's operations, see the Company's Form 10-K for fiscal
year ended September 30, 1996.
Net Loss
For the three months ended December 31, 1996 the Company had a net loss
of $679,302 as compared to a net loss of $1,707,469 for the comparable period in
1995. The decrease in the net loss is described above.
Liquidity and Capital Resources
The Company continues to make progress toward the commercialization of
its technology and movement towards becoming an operating company with less
emphis on development. Cash used by the Company in operating activities
9
<PAGE>
decreased $963,535 during the three months ended December 31, 1996 ($777,944
compared to $1,741,479 for the same period in fiscal year 1996) principally due
to an increase of revenues and a decrease in research and development expense
and selling, general and administrative expense.
The Company increased its investment in property, plant and equipment
from $256,841 in the three month period ended December 31, 1995 to $2,142,344 in
the three months ended December 31, 1996 due principally to the development of
the Utah Project. The Company was able to fund these capital expenditures
principally through the issuance of common stock, funding through limited
partners of Utah Synfuel #1, Ltd. ("Utah Synfuel") of which the Company is the
general partner and 60% equity owner and the issuance of notes payable.
In September 1996, the Company and Alabama Synfuel #1, Ltd. ("Alabama
Synfuel") (a limited partnership in which the Company owns 83% and is the
general partner) entered into a letter of intent with an unregulated subsidiary
of PacifiCorp ("PacifiCorp") to purchase the briquetting facility to be located
in Alabama (the "Alabama Project") from Alabama Synfuel for a one time $500,000
licensing fee, a promissory note in the amount of $3,400,000 that will be
payable out of the cash flow of the plant, and a per ton royalty fee. In
November 1996, the Company and Utah Synfuel entered into a letter of intent with
Arthur J. Gallagher & Co., ("Gallagher") to purchase the Utah Project. As of the
closing of the sale, the Company anticipates that Gallagher will pay Utah
Synfuel an initial payment of $2,500,000 and will enter into a per ton royalty
fee payable out of the cash flow of the Utah Project. The Company and Utah
Synfuel completed construction of the Utah Project and commenced commercial
operations in December, 1996, producing and selling approximately 5,000 tons of
coal briquettes prior to the end of calendar year 1996. The Company has not yet
closed on the sale of such plants, and there can be no assurance Alabama
Synfues and/or that Utah Synfuel will receive the anticipated cash payments from
the sale of such plants.
In connection with construction agreements entered into by the Company
in December 1996, in order to assure the agreements would be considered binding
on the Company, the Company agreed to penalty clauses in the aggregate amount of
$3,012,000 if they failed to build the facilities. There can be no assurance
that the facilities will be built. In connection with licensing agreements
entered into by the Company, in December 1996, the Company entered into
indemnity agreements with a contractor which may result in a contingent
liability of up to $4,500,000 on or after June 2, 1998. For a more detailed
description of the construction and licensing agreements, see the Company's Form
10-K for fiscal year ended September 30, 1996.
The Company anticipates that cash flow from (i) the sale of certain
coal facilities, (ii) fees for the operation of facilities owned by third
parties, (iii) licensing and royalty fees from new plants utilizing the
briquetting technology, (iv) the sale of chemical binder to new plants utilizing
the briquetting technology, (v) sale of synthetic coal products, (vi) fees from
port operations and loading, (vii) cash distributions from its limited
partnership interests and (viii) payments on notes receivable will be used to
fund working capital and other operating needs. Most of the cash flow from the
above sources will not occur until late 1997 and in subsequent years.
In October 1996, as part of the PacifiCorp letter of intent, PacifiCorp
agreed in principal to a convertible loan with the Company in an amount of up to
$5,000,000. The Company has not yet drawn down any cash under the loan. If this
loan is made, PacifiCorp would retain a security interest in all of the assets
related to the Alabama Project. If the loan is made, the loan would be
10
<PAGE>
convertible into Company common stock. The Company common stock received upon
conversion would be subject to piggy-back and demand registration rights. The
obligations of PacifiCorp and its affiliates are subject to PacifiCorp, the
Company and Alabama Synfuel entering into definitive binding agreements.
In November 1996, the Company issued convertible subordinated
debentures in the principal amounts of $300,000, $200,000 and $500,000 to Mr.
Douglas M. Kinney, Mr. Gordon, L. Deane and the Douglas M. Kinney 1999 Retained
Annuity Trust, respectively. The convertible subordinated debentures accrue
interest at prime plus two percent (2%) with interest and principal payable in
full on June 30, 1998. All or a portion of the unpaid principal due on the
convertible subordinated debenture is convertible into Company common stock.
Through a separate subscription agreement, the Company has granted piggy-back
registration rights to the investors for Company common stock issued upon
conversion of the convertible subordinated debentures. The Company has the right
to prepay the principal of the convertible subordinated debentures.
In December 1996, the Company entered into a Debenture Agreement and
Security Agreement with AJG Financial Services, Inc. to borrow $4,000,000. In
December 1996, $1,100,000 in convertible subordinated debentures were issued and
funded, with an additional $2,900,000 in credit available for future draw downs
pursuant to Senior Debentures (non-convertible) to be issued by the Company. On
January 2, 1997, the Company drew down $588,683 and on February 4, 1997 the
Company drew down an additional $1,313,514 of the available $2,900,000. The
balance of the $2,900,000 loan will be used for working capital and for the
construction and development of coal agglomeration facilities.
On January 27, 1997, the Company engaged RAS Securities Corp. to act as
placement agent on a "best efforts" offering of a minimum aggregate principal
amount of $1,000,000 ($3,000,000 maximum) of 8% Convertible Subordinated
Debentures of the Company to accredited investors. Such debentures would have an
established floor and ceiling conversion price, and the shares issued upon
conversion would be entitled to piggy-back and demand registration rights. No
assurances can be given that RAS Securities Corp. will be able to place the
minimum offering successfully. Such offering is being made only by means of a
private offering memorandum and statements relating to such offering herein are
neither offers to sell nor solicitation of offers to buy.
The Company believes that the resources described above will be
adequate to meet its obligations in fiscal year 1997, notwithstanding its
working capital deficit at December 31, 1996.
Forward Looking Statements
Statements regarding the Company's expectations as to its liquidity,
capital resources and certain other information presented in this Form 10-Q
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. In addition to matters
affecting the economy and the Company's industry generally, factors which could
cause actual results to differ from expectations include, but are not limited
to, the following:
(i) The commercial success of the Company's briquetting technology.
(ii) Procurement of necessary equipment to place facilities into
operation.
(iii) Securing of necessary sites and raw materials for facilities to
be constructed and operated.
(iv) Timely construction and completion of facilities.
11
<PAGE>
(v) Ability to obtain needed additional capital on terms acceptable
to the Company.
(vi) Changes in governmental regulation or failure to comply with
existing regulation could result in operational shutdowns of
its facilities.
(vii) The continuance of tax credit availability under Section 29 of
the Internal Revenue Code. (viii) Ability to meet financial
commitments under existing contractual arrangements.
With respect to tax credits under Section 29 of the Internal Revenue
Code of 1986, as amended ("Section 29"), on February 6, 1997, the Treasury
Department released the General Explanations of the Administration's Revenue
Proposals, which summarizes the tax-related provisions from the President's
Fiscal Year 1998 Budget submission to Congress (the "Proposed Federal Budget").
The current version of the Proposed Federal Budget proposes an amendment to a
provision of Section 29. Currently, Section 29 requires that facilities
producing certain qualified fuels (including solid synthetic fuel produced from
coal) that are constructed pursuant to a binding contract in place by December
31, 1996 be placed in service by June 30, 1998. (The "placed in service date"
and "binding contract date" have been previously extended on several occasions,
most recently by the Small Business Job Protection Act of 1996.) The Proposed
Federal Budget proposes that the placed in service date be changed to June 30,
1997 (the "Amendment"). If adopted, the Amendment would materially adversely
affect the financial condition of the Company.
The Company intends to oppose the Amendment together with other
interested parties. The Company believes that there will be significant
opposition to the Amendment and that the Amendment will likely be removed from
the Proposed Federal Budget in the approval process. However, no assurance can
be given that the Proposed Federal Budget as it is currently written, along with
the corresponding Amendment, will not be approved, or that some other amendment
to Section 29 will not be adopted.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES.
Recent Sales of Unregistered Securities
The following sets forth all securities issued by the Company within
the past fiscal quarter without registering the securities under the Securities
Act of 1933, as amended. No underwriters were involved in any stock issuances
nor were any commissions or similar fees paid in connection therewith.
The Company believes that the following issuances of shares of common
stock and debentures were exempt from the registration requirements of the
Securities Act of 1933, as amended, pursuant to the exemption set forth in
Section 4(2) thereof and the certificate for each such security bears a
restrictive legend.
In November 1996, the Company issued convertible subordinated
debentures in the principal amounts of $300,000, $200,000 and $500,000 to Mr.
Douglas M. Kinney, Mr. Gordon L. Deane and the Douglas M. Kinney 1999 Retained
Annuity Trust, respectively. The convertible subordinated debentures accrue
interest at prime plus two percent (2%) with interest and principal payable in
full on June 30, 1998. All or a portion of the unpaid principal due on the
convertible subordinated debenture is convertible into Company common stock.
Through a separate subscription agreement, the Company has granted piggy-back
registration rights to the investors for Company common stock issued upon
conversion of the convertible subordinated debentures. The Company has the right
to prepay the principal of the convertible subordinated debentures. Finally, the
investors have represented to the Company that they are "Accredited Investors"
as defined under Rule 501 of the Securities Act of 1933, as amended.
In December 1996, the Company entered into a Debenture Agreement and
Security Agreement with AJG Financial Services, Inc., an affiliate of Gallagher
("AJG Financial"), whereby the Company borrowed $1,100,000, and may, under
certain circumstances, draw down an additional amount of up to $2,900,000 (for a
total borrowed amount of $4,000,000). In consideration for the loan of
$1,100,000, the Company issued a convertible subordinated debenture accruing
interest at 6% per annum and maturing three years from its date of issuance (the
"Subordinated Debenture"). The interest and principal of the Subordinated
Debenture is payable on maturity. The Company does not have the right to prepay
any portion of the principal of the Subordinated Debenture, and the Company is
required to prepay the Subordinated Debenture if a change in control of the
Company occurs. All or a portion of the unpaid principal due on the Subordinated
Debenture is convertible into Company common stock. The Subordinated Debenture
is subordinated and junior in rights to all other existing indebtedness of the
Company which is not expressly pari passu with or subordinated to the
Subordinated Debenture. Finally, the Company has granted piggy-back and demand
registration rights to AJG Financial for the Company common stock issued upon
conversion of the Subordinated Debenture.
On January 2, 1997 and February 4, 1997, the Company borrowed $588,683
and $1,313,544, respectively, of the $2,900,000 draw down loan amount described
13
<PAGE>
above. In consideration for the amount drawn down, the Company issued senior
debentures in such amounts accruing interest at prime plus two percent (2%) and
maturing three years from the date of issuance (the "Senior Debentures"). The
Senior Debentures are collateralized by all real and personal property purchased
by the Company with the proceeds of the Senior Debentures. The proceeds of the
Subordinated Debenture and the Senior Debentures may be used to satisfy
contractual obligations of the Company, for working capital and to purchase
equipment to be used to construct coal briquetting facilities to be managed
and/or sold by the Company or affiliates of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Those exhibits previously filed with the Securities
and Exchange Commission as required by Item 601 of
Regulation S-K, are incorporated herein by reference
in accordance with the provisions of Rule 12b-32.
EX 27.1 Finacial Data Schedule
(b) Reports on Form 8-K
No current report on Form 8-K was filed during the
quarter.
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 14, 1997
COVOL TECHNOLOGIES, INC.
By: /s/ Brent M. Cook
--------------------------------------
Brent M. Cook, Chief Executive Officer
and Principal Executive Officer
By: /s/ Stanley M. Kimball
--------------------------
Stanley M. Kimball, Principal
Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 949,289
<SECURITIES> 0
<RECEIVABLES> 87,370
<ALLOWANCES> 0
<INVENTORY> 217,234
<CURRENT-ASSETS> 1,308,268
<PP&E> 9,670,402
<DEPRECIATION> 454,159
<TOTAL-ASSETS> 11,501,623
<CURRENT-LIABILITIES> 4,896,790
<BONDS> 0
0
0
<COMMON> 7,734
<OTHER-SE> (703,350)
<TOTAL-LIABILITY-AND-EQUITY> 11,501,623
<SALES> (104,147)
<TOTAL-REVENUES> (104,147)
<CGS> 364,580
<TOTAL-COSTS> 469,647
<OTHER-EXPENSES> 377,121
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65,876
<INCOME-PRETAX> (679,302)
<INCOME-TAX> 0
<INCOME-CONTINUING> (679,302)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (679,302)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
