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 June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from _______________________________________________
Commission file number 0-27803
COVOL TECHNOLOGIES, INC.
(Exact name of registrant 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 14 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 8,558,123 Shares of Common Stock
at August 12, 1997
<PAGE>
COVOL TECHNOLOGIES, INC.
TABLE OF CONTENTS
Page No.
Part I - Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets..............................1
Consolidated Statements of Operations....................2
Consolidated Statements of Cash Flows....................3
Notes to Financial Statements............................4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations...............................................9
Part II - Other Information
Item 1. Legal proceedings.......................................15
Item 2. Changes in securities...................................15
Item 3. Defaults upon senior securities.........................16
Item 4. Submission of matters to a vote
of security holders.....................................16
Item 5. Other information.......................................17
Item 6. Exhibits and reports on Form 8-K........................18
Statements in this Form 10-Q, including those concerning the
Registrant's expectations regarding its business, and certain of the
information presented in this report, constitute forward looking
statements within the meaning of the Private Securities Litigation
Reform Act of 1995. As such, actual results may vary materially from
such expectations. For a discussion of the factors which could cause
actual results to differ from expectations, please see the caption
entitled "Forward Looking Statements" in ITEM 2 hereof. There can be no
assurance that the Registrant's results of operations will not be
adversely affected by such factors.
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
-------------------
As of As of
June 30, September 30,
ASSETS 1997 1996
----------------- ------------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 401,867 $ 490,106
Receivables 310,487 77,744
Receivable - related parties 79,540 0
Inventories 1,739,204 162,757
Advances on inventory 750,000 0
Notes receivable - current 279,942 0
Notes receivable - related parties, current 0 3,733
Prepaid expenses and other current assets 109,100 44,733
----------------- ------------------
Total current assets 3,670,140 779,073
----------------- ------------------
Property, plant and equipment, net of accumulated depreciation 10,024,967 7,125,245
----------------- ------------------
Other assets:
Cash surrender value of life insurance 152,112 152,112
Notes receivable - non-current 3,140,053 0
Notes receivable - related parties, non-current 672,125 700,000
Deposits and other assets 113,608 15,642
----------------- ------------------
Total other assets 4,077,898 867,754
----------------- ------------------
Total assets $ 17,773,005 $ 8,772,072
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,174,477 $ 2,183,278
Payable for coal briquetting equipment 2,255,850 0
Accrued liabilities 134,839 333,936
Notes payable, current 529,224 958,086
Convertible debentures, current 1,696,222 0
Notes payable - related parties, current 821,790 786,000
----------------- ------------------
Total current liabilities 6,612,402 4,261,300
----------------- ------------------
Long-term liabilities:
Accrued interest payable, non-current 178,681 0
Notes payable, non-current 2,900,011 150,980
Convertible debentures, non-current 1,000,000 0
Deferred compensation 369,462 212,612
----------------- ------------------
Total long-term liabilities 4,448,154 363,592
----------------- ------------------
Total liabilities 11,060,556 4,624,892
----------------- ------------------
Minority interest in consolidated subsidiaries 4,589,514 4,380,544
----------------- ------------------
Commitments and contingencies (note 7)
Stockholders' equity (deficit):
Preferred stock: $0.001 par value; authorized: 10,000,000
shares issued and outstanding: $0 at June 30, 1997 and $0
at Sept. 30, 1996 0 0
Common stock: $0.001 par value; authorized: 25,000,000
shares issued and outstanding: 8,469,838 at June 30, 1997
and 7,610,373 at September 30, 1996 8,470 7,610
Common stock to be issued: 40,000 shares at June 30, 1997
and 103,750 at September 30, 1996 40 104
Capital in excess of par value 38,926,763 32,780,515
Capital in excess of par value - common stock to be issued 239,960 934,896
Accumulated deficit (24,107,802) (21,196,476)
Notes and interest receivable - related parties from issuance of
or collateralized by common stock (net of allowance) (7,566,415) (7,580,071)
Deferred compensation from stock options (5,378,081) (5,179,942)
----------------- ------------------
Total stockholders' equity (deficit) 2,122,935 (233,364)
----------------- ------------------
Total liabilities and stockholders' equity (deficit) $ 17,773,005 $ 8,772,072
================= ==================
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
1
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
-----------------------
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
------------ ------------- -------------- -------------
Revenues:
<S> <C> <C> <C> <C>
License fee $ 0 $ 0 $ 1,400,000 $ 0
Synthetic fuel sales 0 33,431 124,341 37,172
Returns on synthetic fuel sales 0 0 (82,500) 0
Binder sales 130,112 0 134,129 0
------------ ------------- -------------- -------------
Total revenues 130,112 33,431 1,575,970 37,172
------------ ------------- -------------- -------------
Operating costs and expenses:
Cost of briquetting operations 390,224 258,197 1,139,916 688,523
-------
Research and development 92,856 420,050 263,319 945,301
Selling, general and administrative 672,780 1,368,951 1,902,617 3,040,541
Compensation expense on stock options 384,414 1,425,929 933,112 4,315,798
Expense on issuance of common stock 342,805 4,500 383,305 73,623
Minority interest in income of
consolidated subsidiaries 27,366 0 178,292 0
------------ ------------- -------------- -------------
Total operating costs and expenses 1,910,445 3,477,627 4,800,561 9,063,786
------------ ------------- -------------- -------------
Operating income (loss) (1,780,333) (3,444,196) (3,224,591) (9,026,614)
------------ ------------- -------------- -------------
Other income (expense):
Write-down of note receivable (note 4) (100,000) (2,250,000) (150,000) (2,449,575)
Interest income 189,559 88,594 449,146 199,950
Interest expense (95,501) (1,558) (301,398) (45,606)
Other income (expense) 15,438 (60) 19,891 (144,258)
Gain on sale of assets 299,822 0 295,626 0
------------ ------------- -------------- -------------
Total other income (expense) 309,318 (2,163,024) 313,265 (2,439,489)
------------ ------------- -------------- -------------
Loss from continuing operations before
income taxes (1,471,015) (5,607,220) (2,911,326) (11,466,103)
Income tax provision 0 0 0 (23,000)
------------ ------------- -------------- -------------
Loss from continuing operations (1,471,015) (5,607,220) (2,911,326) (11,489,103)
------------ ------------- -------------- -------------
Discontinued operations:
Loss from discontinued operations 0 0 0 (590,480)
Loss on disposal of discontinued operations 0 0 0 (291,025)
------------ ------------- -------------- -------------
Income (loss) from discontinued operations 0 0 0 (881,505)
------------ ------------- -------------- -------------
Net loss $ (1,471,015) $ (5,607,220) $ (2,911,326) $ (12,370,608)
============ ============= ============== =============
Net loss per common share:
Loss per share from continuing operations $ (0.18) $ (0.77) $ (0.37 $ (1.72)
Loss per share from discontinued operations 0.00 0.00 0.00 (0.13)
------------ ------------- -------------- -------------
Net loss per share (note 2) $ (0.18) $ (0.77) $ (0.37) $ (1.85)
============ ============= ============== =============
Weighted average shares outstanding 8,192,603 7,258,406 7,921,253 6,699,062
============ ============= ============== =============
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
2
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
---------------------------------
Nine Months Ended Nine Months Ended
June 30, June 30,
1997 1996
------------------ --------------------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (2,911,326) $ (12,370,608)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 176,253 137,003
Common stock issued for settlement and services 383,305 365,956
Write-down of note receivable 150,000 2,449,575
Amortization of deferred compensation on stock options 933,112 4,315,798
Loss on disposal of discontinued subsidiaries 0 291,025
Interest earned on notes receivable - related parties, collateralized
by common stock (242,344) (177,189)
Loss on sale of assets 4,196 0
Deferred income taxes 0 23,000
Gain applicable to minority interests in subsidiaries 150,970 0
Increase (decrease) from changes in assets and liabilities of continuing
operations:
Receivables (232,743) (12,376)
Receivables - related parties (79,540) 0
Inventories (1,576,447) (22,208)
Advances on inventory (750,000) 0
Prepaid expenses and other current assets (64,367) 9,177
Deposits and other assets (97,966) (18,553)
Accounts payable (1,008,801) 1,417,862
Payable for coal briquetting equipment 2,255,850 0
Accrued liabilities (199,097) (121,635)
Accrued interest payable, non-current 178,681
Deferred compensation 156,850 7,981
Discontinued operations non-cash charges and working capital changes 0 (202,259)
------------- ---------------
Net cash used in operating activities (2,773,414) (3,907,451)
------------- ---------------
Cash flows from investing activities:
Cash paid for property, plant and equipment (6,580,171) (2,569,530)
Issuance of notes receivable (49,456) (8,495)
Proceeds from notes receivable 129,464 0
Proceeds from notes receivable - related parties 31,608 2,738
Increase in cash surrender value of life insurance 0 (12,500)
------------- ---------------
Net cash used in investing activities (6,468,555) (2,587,787)
------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of limited partnership interests in subsidiaries 350,000 832,500
Payments on distribution to limited partnership interests in subsidiaries (292,000) 0
Proceeds from notes payable 6,597,493 0
Proceeds from notes payable - related party 109,470 0
Payment on notes payable (317,573) (24,494)
Payment on notes payable - related parties (73,683) (2,291,426)
Proceeds from note receivable - related parties collateralized by common stock 106,000 859,160
Proceeds from issuance of common stock (net) 2,674,023 6,267,031
------------- ---------------
Net cash provided by financing activities 9,153,730 5,642,771
------------- ---------------
Net decrease in cash (88,239) (852,467)
Total cash and cash equivalents, beginning of period 490,106 1,291,166
------------- ---------------
Total cash and cash equivalents, end of period $ 401,867 $ 438,699
============= ================
Supplemental schedule of noncash investing and financing activities:
Common stock issued for notes receivable $ 0 $ 6,159,375
Common stock issued in conversion of convertible debentures 1,263,530 0
Obligations assumed in connection with sale of subsidiaries 0 4,636,435
Note receivable for subsidiaries (net of imputed interest) 0 4,349,575
Notes receivable issued for sale of briquetting facility 3,500,000 0
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
3
<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 June 30, 1997, the results of its
operations for the three months and nine months ended June 30, 1996 and June 30,
1997 and its cash flows for the nine months ended June 30, 1996 and June 30,
1997. 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
Weighted 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.
3. Inventories and Advances on Inventories
Inventories and advances on inventories are stated at the lower of average cost
or market, and consist of coal fines, synthetic fuel, binder materials, and coal
fines.
4. Change in Estimate of Fair Value of Note Receivable
During the three months ended June 30, 1997, the Company increased the allowance
for impairment on the $5,000,000 face value note receivable from two
stockholders by $100,000 to an adjusted loan value of $1,500,000. The increase
in the allowance was based upon a $0.50 per share decrease in the Company's
common stock that collateralizes the note receivable. The estimate is subject to
future fluctuations due to market changes. (See Part II, Item 5 for discussion
of note receivable.)
5. Convertible Debentures
AJG Financial Services, Inc.
In December 1996, the Company entered into a Debenture Agreement and Security
Agreement with AJG Financial Services, Inc., an affiliate of Arthur J.
Gallagher, whereby the Company borrowed $1,100,000, and could, 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"). All or a portion of the unpaid principal due on the Subordinated
Debenture is convertible into Company common stock. On May 5, 1997, AJG
Financial Services, Inc. executed its option to convert the loan of $1,100,000
to an equity position.
4
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
----------------------------------------
5. Convertible Debentures (continued)
During the quarter ended June 30, 1997, the Company borrowed $107,827 and
borrowed $2,792,172 in the previous quarter ended March 31, 1997 of the
$2,900,000 loan available under the Debenture Agreement with AJG Financial
Services, Inc. as described above. In consideration for the amounts 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 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 synthetic fuel
facilities to be managed and/or sold by the Company or affiliates of the
Company.
PacifiCorp Financial Services, Inc.
As a part of its Alabama transaction with PacifiCorp, the Company executed a
Convertible Loan and Security Agreement with PacifiCorp Financial Services, Inc.
("PFS") dated March 20, 1997. The agreement provides for the Company to borrow
up to $5,000,000 primarily for: completing construction of the Alabama project,
acquiring coal fines and for other purposes related to the project. To secure
the loan, the Company and Alabama Synfuel #1, Ltd. gave PFS a security interest
in all personal and real property assets connected with the Alabama project. The
loan accrues interest at prime plus two percent (2%) with interest and principal
payable on March 20, 1998. The agreement provides PFS with the option to convert
the unpaid principal and interest and any remaining loan commitment amount into
shares of the Company's common stock, convertible at $7.00 per share. As of June
30, 1997 the Company has drawn $1,696,222 on the $5,000,000 credit line.
5
<PAGE>
<TABLE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
----------------------------------------
6. Stockholders' Equity
The table below presents the activity in stockholders' equity from April 1, 1997
through June 30, 1997.
<CAPTION>
Notes and interest
Common Stock Common Stock to be issued receivable-related
______________________________ ____________________________ parties from Deferred
Capital in Capital in issuance of, or compensation
excess of excess of Accumulated collateralized on stock
Shares Amount par valued Shares Amount par value Deficit by, common stock options
--------- ------ ----------- ------- ------ ---------- ------------ ----------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1997 7,944,870 $7,945 $35,397,078 0 $0 $0 ($22,636,787) ($7,587,966) ($5,468,745)
Common stock issued for 343,996 344 1,768,178 40,000 40 239,960
cash including exercise
of stock options (net)
Common stock issued in 140,642 141 1,124,992
conversion of convertible
debenture
Common stock issued in 40,330 40 342,765
settlement
Cash received in payment 3,000
on notes receivable-related
parties from issuance of
common stock
Deferred compensation 293,750 (293,750)
related to the issuance
of stock options at below
market value to officers,
directors, employees and
consultants
Amortization of deferred 384,414
compensation on stock
options
Interest earned on notes (81,449)
receivable - related
parties from issuance of
or collateralized by
common stock
Write-down of notes 100,000
receivable - related party
Net loss for the quarter (1,471,015)
ended June 30, 1997
--------- ------ ----------- ------- ------ -------- ------------ ---------- ------------
Balance at June 30, 1997 8,469,838 $8,470 $38,926,763 40,000 $40 $239,960 ($24,107,802) ($7,566,415) ($5,378,081)
========= ====== =========== ======= ====== ======== ============ ==========
</TABLE>
6
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
----------------------------------------
7. Contingencies
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.
The Company entered into a letter of intent with Innovative Technologies in July
of 1995 to apply Covol's briquetting technology to certain metallic ores
supplied by Innovative. The Company conducted numerous tests of the ore through
the fall of 1995, and concluded from the results that the venture was not
economically viable. Accordingly, final agreement to process the ore was never
reached. Innovative filed suit in March 1997, alleging that Covol breached its
letter of intent with Innovative. On March 4, 1997, Innovative Holding Company,
Inc., a California corporation, and ORO Limited, a California limited
partnership, filed a civil complaint against the Company alleging breach of the
letter of intent in the amount of $500,000 plus damages. The Company believes
the case is without merit and will vigorously defend the suit.
On February 1, 1996, the Company entered into a Stock Purchase Agreement (the
"Agreement") with former principals of IME, State, CIC and Larson to sell all of
the common shares of the subsidiaries to the Buyers for a $5,000,000 face value
6% promissory note (the "Note"). The Buyers have raised various contentions
regarding the Note and the Agreement. The Note is collateralized by 100,000
shares of the Company's common stock owned by the Buyers and held by the
Company, 100,000 shares of the Company's common stock committed by the Buyers to
be provided to the Company, and personal guarantees of the Buyers. The Buyers
claim that Covol is responsible to pay additional amounts beyond the $3,500,000
provided for in the agreement. Furthermore, the Buyers claim that the Company
represented to them payment terms that are different from the original
promissory note. The Company accrued as of September 30, 1996 approximately
$650,000 of additional expenses related to the discontinued operations for the
wind-down period which were paid or accrued by the subsidiaries. The Company is
investigating the claims made by the Buyers and the Company anticipates that an
amicable settlement can be reached. However, there can be no assurance that a
settlement will be reached with the Buyers.
In connection with the engagement of RAS Securities Corp. as placement agent and
as settlement of a dispute regarding the Letter Agreement, the Company entered
into a Settlement Agreement, dated as of January 27, 1997, with RAS and certain
principals of RAS whereby the Company agreed to issue approximately 26,300
shares of Company common stock to the Individuals in settlement of certain
alleged rights under a Letter Agreement, dated as of April 5, 1996, by and among
RAS and the Company. Under the disputed Letter Agreement, RAS exercised certain
warrants to purchase 65,000 shares of Company common stock. In accordance with
the RAS Settlement Agreement, the parties are mutually released from their
respective rights and obligations, if any, under the Letter Agreement.
7
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
----------------------------------------
Contingencies, continued
On June 5, 1997 Brandt Filtration Group, Inc. filed a complaint against the
Company in the State Court for Gwinnett County, State of Georgia. The plaintiff
also named Pacific Power & Light Company ("Pacific") as a defendant. The
plaintiff prayed for $160,340 plus other unspecified damages and legal expenses.
The complaint alleges that the Company breached a contract to purchase air
filtration equipment for the Alabama project from Brandt and further alleges
that the Company acted as agent for Pacific. Pacific removed the action to the
United States District Court for the Northern District of Georgia. The Company
and Pacific have answered the complaint, denying any agency liability on the
part of Pacific. Pacific has filed a motion seeking to have the action dismissed
against it. The Company disputes the amounts claimed by the plaintiff and
intends to defend the action if a suitable settlement cannot be reached.
On June 26, 1997 Kirby Cochran, former President of the Company during the
period from September of 1995 through May of 1996, filed a complaint against the
Company in the Fourth Judicial District for Utah County, State of Utah. The
plaintiff also named unspecified John Does 1-5 as defendants. The complaint
alleges that Mr. Cochran is entitled to a declaratory judgment awarding him
options to purchase 600,000 shares of the Company's stock plus damages of
$50,000 as repayment of a purported loan. The complaint further alleges claims
of conversion, fraud, and breach of contract related to the stock options and
loan. Finally, the complaint alleges a claim for punitive damages and other
unspecified special or general damages. The Company has filed a petition to
remove the action to the United States District Court for the District of Utah.
The Company has answered the complaint, denying liability and intends to
vigorously defend the action. Further, the Company intends to file counterclaims
against Mr. Cochran.
8. Other Matters
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share. This statement
establishes standards for computing and presenting earnings per share ("EPS")
and makes them comparable to international EPS standards. This statement is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. The Company is currently evaluating the impact of the
recently issued statement and will adopt the requirements for the year ending
September 30, 1998. The Company has reviewed other recently issued, but not
yet adopted, accounting standards in order to determine their effects, if any,
on the results of operations or financial position of the Company. Based on that
review, the Company believes that none of these pronouncements will have a
significant effect on current or future earnings or operations.
8
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
---------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of Operations
Three months ended June 30, 1997 compared to three months ended June 30, 1996
Revenues
For the quarter ended June 30, 1997, total revenues were increased by $96,681 to
$130,112 compared to $33,431 in the comparable period in 1996. Binder sales were
$130,112 for the quarter ended June 30, 1997 compared to no binder sales for the
same period ended June 30, 1996. Synthetic fuel sales decrease to $0 for the
quarter ended June 30, 1997 from $33,431 for the same period in 1996. The
increase in binder sales is attributable to an increase in production at the
Utah plant, while the decrease in synthetic fuel sales is a result of the
stockpiling of synthetic fuel product pending the refining and marketing of the
synthetic fuel product.
Margins, Costs and Expenses
The Company's operating loss decreased by $1,663,863 to $1,780,333 for the
quarter ended June 30, 1997 from a loss of $3,444,196 reported for the same
period June 30, 1996 due principally to: a decrease of research and development
expense of $327,194 from $420,050 for the quarter ended June 30, 1996 to $92,856
for the same period ended June 30, 1997; a decrease of selling, general and
administrative from $1,368,951 for the quarter ended June 30, 1996 to $672,780
for the quarter ended June 30, 1997 ; a decrease of compensation expense on
stock options from $1,425,929 for the quarter ended June 30, 1996 to $384,414
for the quarter ended June 30, 1997. Expense on issuance of common stock
increased to $342,805 for the quarter ended June 30, 1997 compared to $4,500 for
the same period ended June 30, 1996. Cost of briquetting operations increased
$132,027 to $390,224 for the quarter ended June 30, 1997 from $258,197 for the
quarter ended June 30, 1996. Minority interest in income of consolidated
subsidiaries increased to $27,366 for the quarter ended June 30, 1997 compared
to $0 for the same quarter ended June 30, 1996. Compensation expense on stock
options for the quarter ended June 30, 1996 of $1,425,929 is based on the
related financial statement for that period filed in the Company's Form 10-Q/A,
Amendment No. 1 for the period ended June 30, 1996.
Net Loss
For the quarter ended June 30, 1997, the Company had a decrease in net loss of
$4,136,205 to $1,471,015 as compared to a net loss of $5,607,220 for the
comparable period in 1996. Other income increased $2,472,342 to $309,318 income
for the quarter ended June 30, 1997 compared to a $2,163,024 loss for the same
quarter ended June 30, 1996 principally due to: a decrease of write-down of note
receivable to $100,000 for the quarter ended June 30, 1997 from a write-down of
$2,250,000 for the same quarter ended June 30, 1996; interest income increased
by $100,965 to $189,559 for the period ended June 30, 1997 from $88,594 for the
same period ended June 30, 1996; and, gain on sale of assets increased to
$299,822 for the quarter ended June 30, 1997 from $0 for the same quarter ended
June 30, 1996. Interest expense increased to $95,501 for the quarter ended June
30, 1997 from $1,558 for the same quarter ended June 30, 1996.
9
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COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
---------------------------------------
Results of Operations
Nine months ended June 30, 1997 compared to nine months ended June 30, 1996
Revenues
For the nine months ended June 30, 1997, total revenues were increased by
$1,538,798 to $1,575,970 compared to $37,172 in the comparable period in 1996. A
one-time license fee of $1,400,000 was the primary reason for the increased
revenue. Binder sales were $134,129 for the nine months ended June 30, 1997
compared to no binder sales for the same period ended June 30, 1996. Synthetic
fuel sales increased to $124,341 with a return on synthetic fuels of $82,500 for
the period ended June 30, 1997 from a total of $37,172 for synthetic fuels sales
for the same period ended June 30, 1996. The license fee revenue was earned in
connection with the sale of the Utah Project. The Company anticipates that it
will continue to earn license fees from the Utah Project and from the sale and
operation of similar plants.
Margins, Costs and Expenses
The Company's operating loss decreased to $3,224,591 for the nine months ended
June 30, 1997 from a loss of $9,026,614 reported for the same period June 30,
1996 due principally to: a decrease of research and development expense of
$681,982 from $945,301 for the nine months ended June 30, 1996 to $263,319 for
the same period ended June 30, 1997; a decrease of selling, general and
administrative from $3,040,541 to $1,902,617 for the nine months ended June 30,
1997; a decrease of compensation expense on stock options from $4,315,798 for
the nine months ended June 30, 1996 to $933,112 for the nine months ended June
30, 1997. Expense on issuance of common stock increased to $383,305 for the nine
months ended June 30, 1997 compared to $73,623 for the same period ended June
30, 1996. Cost of briquetting operations increased by $451,393 from $688,523 for
the nine months ended June 30, 1996 to $1,139,916 for the nine months ended June
30, 1997. Minority interest in income of consolidated subsidiaries increased to
$178,292 for the nine months ended June 30, 1997 compared to $0 for the same
nine months ended June 30, 1996. Compensation expense on stock options for the
nine months ended June 30, 1996 of $4,315,798 is based on the restated financial
statements for that period filed in the Company's Form 10-Q/A, Amendment No. 1
for the period ended June 30, 1996.
Net Loss
For the nine months ended June 30, 1997, the Company has a net loss of
$2,911,326 as compared to a net loss of $12,370,608 for the comparable period in
1996. Other income increased to $313,265 for the nine months ended June 30, 1997
from a loss of $2,439,489 for the same nine months ended June 30, 1996
principally due to: a decrease of write-down of note receivable to $150,000 for
the nine months ended June 30, 1997 from a write-down of $2,449,575 for the same
nine months ended June 30, 1996; interest income increased $249,196 to $449,146
for the nine months ended June 30, 1997 from $199,950 for the same period ended
June 30, 1996; and, gain on sale of assets increased to $295,626 for the nine
months ended June 30, 1997 from $0 for the same nine months ended June 30, 1996.
Interest expense increased to $301,398 for the nine months ended June 30, 1997
from $45,606 for the nine months ended June 30, 1996.
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 emphasis
on development. Cash used by the Company in operating activities decreased
$1,134,037 during the nine months ending June 30, 1997 ($2,773,414 compared to
$3,907,451 for the same period in 1996) principally due to an increase of
revenues and a decrease in research and development expense, selling, general
and administrative expense and compensation expense on stock options.
10
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COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
---------------------------------------
The Company increased its investment in property, plant and equipment from
$2,569,530 for the nine months ended June 30, 1996 to $6,580,171 for the nine
months ended June 30, 1997 due principally to the development of the Utah
Project and the Alabama Project. The Company was able to fund these capital
expenditures principally through the issuance of notes payable and the issuance
of common stock.
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.
During the quarter ended March 31, 1997, the Company entered into contractual
arrangements to acquire coal fines and to conduct recovery and preparation
activities. The total obligation to acquire the coal fines is approximately
$5,500,000 of which $750,000 has been paid with the balance due over 3 years.
$395,833 of such obligation is due in fiscal year 1997.
On January 27, 1997, the Company engaged RAS Securities Corp., to act as
placement agent on a "best efforts" private 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. This offering
was terminated by the Company on March 27, 1997 without the placement of any
debentures.
In connection with the engagement of RAS Securities Corp. ("RAS") as placement
agent and as settlement of a dispute regarding the Letter Agreement (defined
below), the Company entered into a Settlement Agreement, dated as of January 27,
1997 (the "RAS Settlement Agreement"), with RAS and certain principals of RAS
(the "Individuals") whereby the Company agreed to issue approximately 40,330
shares of Company common stock to the Individuals in settlement of certain
alleged rights under a Letter Agreement, dated as of April 5, 1996 (the "Letter
Agreement"), by and among RAS and the Company. Under the disputed Letter
Agreement, RAS exercised certain warrants to purchase 65,000 shares of Company
common stock. In accordance with the RAS Settlement Agreement, the parties are
mutually released from their respective rights and obligations, if any, under
the Letter Agreement.
At June 30, 1997, the Company had a working capital deficit of $2,942,262. The
Company is currently in discussions with various sources for equity financing.
The Company believes that the resources described above and the potential equity
financing will be adequate for the Company to meet its obligations in fiscal
year 1997 notwithstanding its working capital deficit at June 30, 1997. However,
there is no assurance that the Company will be able to obtain the necessary
equity financing.
On March 20, 1997, the Company entered into a Convertible Loan and Security
Agreement (the "Loan Agreement") with PacifiCorp Financial Services, Inc., an
Oregon corporation ("PacifiCorp"). Under the Loan Agreement the Company may
borrow up to $5,000,000 as evidenced by a draw down promissory note (the
"Promissory Note") payable to PacifiCorp. As of June 30, 1997, the Company has
drawn $1,696,222 under the Loan Agreement. Principal and accrued interest on the
Promissory Note is due and payable on March 20, 1998 (the "Due Date"), unless
the Promissory Note is converted into Company common stock. Interest due on the
Promissory Note is calculated based on a 360 day year and the actual number of
days lapsed, and will be compounded monthly. The interest rate is a rate per
annum equal to the lesser of (i) the highest rate allowed by law, or (ii) the
sum of the rate of interest publicly announced by Morgan Guaranty Trust Company
of New York in New York City from time to time plus two percent (2%) per annum.
11
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COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
---------------------------------------
The proceeds of the loan (the "Loan") may be used by the Company to (i) complete
construction of the coal briquetting facility to be located in Birmingham,
Alabama (the "Alabama Project"), (ii) finance the purchase of coal fines for the
Alabama Project, (iii) fund the net working capital needs of the Alabama
Project, (iv) finance the development and construction of a wash plant for coal
fines, and (v) other uses related to the Alabama Project approved by PacifiCorp
in its sole discretion. The Company's obligation to repay the Loan is secured by
a security interest and lien on certain property relating to the Alabama Plant.
In addition, PacifiCorp has the right to convert all or a portion of the
principal and unpaid interest on the Loan at any time into shares of Company
common stock at a conversion price of $7.00 per share, subject to certain
adjustments as provided in the Loan Agreement. On May 5, 1997, PacifiCorp filed
a Schedule 13D with the Securities and Exchange Commission reporting its
beneficial ownership of 714,286 shares of Company common stock should PacifiCorp
convert the full amount of the Loan. Pursuant to the Registration Rights
Agreement, dated as of March 20, 1997, between the Company and PacifiCorp,
PacifiCorp has been granted certain "demand" and "piggy-back" registration
rights with respect to shares of Company common stock that could be acquired by
PacifiCorp pursuant to the Loan Agreement.
Pursuant to the Alabama Project Purchase Agreement, dated as of March 20, 1997
(the "Purchase Agreement"), by and between the Company, Alabama Synfuel #1,
Ltd., a Delaware limited partnership ("Alabama Synfuel") and Birmingham Syn
Fuel, L.L.C., an Oregon limited liability company ("Birmingham Syn Fuel"), the
Company and Alabama Synfuel have agreed to sell, and Birmingham Syn Fuel has
agreed to buy, the Alabama Project, subject to the terms and conditions of the
Purchase Agreement. The purchase price for the Alabama Project would be
$3,400,000 and would be payable in the form of a nonrecourse promissory note
secured by certain property of the Alabama Project. There are numerous
conditions to the closing of the sale of the Alabama Project, including, but not
limited to, the receipt of an Internal Revenue Service Private Letter Ruling
(the "Letter Ruling").
In connection with the Loan from PacifiCorp described above and the pending sale
of the Alabama Project, Birmingham Syn Fuel I, Inc., and Birmingham Syn Fuel II,
Inc. (collectively, the "PFS Parties"), PacifiCorp, Alabama Synfuel and the
Company entered into the Conditional Option Agreement, dated as of March 20,
1997 (the "Conditional Option Agreement"). Under the Conditional Option
Agreement, the Company granted to the PFS Parties and to PacifiCorp a put option
to require the Company to simultaneously purchase all of the rights, title and
interest of the PFS Parties in Birmingham Syn Fuel and all of the interest of
PacifiCorp in the Loan and in the other Transactional Documents (as that term is
defined in the Purchase Agreement) excluding shares obtained in conversion of
the Loan if (i) the Alabama Project is not completed consistent with Birmingham
Syn Fuel's approved plans and specifications and placed in service (within the
meaning of Section 29 of the Internal Revenue Code of 1996) by June 30, 1997,
(ii) a Letter Ruling (as defined above) is not received by June 30, 1997 which
is satisfactory to Birmingham Syn Fuel or (iii) if, at any time, there has
occurred and is continuing an "Event of Default" under the Loan Agreement (each
being referred to herein as a "Put Event"). In no event, however, shall a Put
Event occur after receipt of a satisfactory Letter Ruling by Birmingham Syn
Fuel.
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 (the "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. During the quarter ended March 31, 1997 the Company
drew down $2,792,173 and on April 14, 1997 the Company drew down the remaining
$107,827 of the available $2,900,000. On May 5, 1997 the $1,100,000 convertible
subordinated debentures and accrued interest were converted into 140,642 shares
of common stock based on a conversion price of $8.00 per share.
In July, 1996, the Company borrowed $700,000 from Key Bank. The loan was
personally guaranteed by seven officers, directors and employees of the Company.
The current outstanding balance on the loan, including interest and fees is
$523,940. The Company and Key Bank have previously negotiated rollovers of the
loan. The current rollover matured May 30, 1997. Key Bank has notified the
Company that it is in default on the loan. The Company is arranging with Key
Bank to pay off the loan.
12
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COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
---------------------------------------
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 fuel product, (vi) fees from port
operations and loading, (vii) cash distributions from its partnership interests
and (viii) collections 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.
13
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COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
---------------------------------------
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.
(v) Ability to obtain needed additional capital on terms
acceptable to the Company in order to finance the development
of the briquetting technology and working capital needs.
(vi) Changes in governmental regulation or failure to comply with
existing regulation could result in operational shutdowns of
its facilities.
(vii) The ongoing availability of tax credits 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
1996, as amended ("Section 29"), on February 6, 1997, the Treasury Department
released the General Explanations of the Administration's Revenue Proposals,
which summarized the tax-related provisions from the President's Fiscal Year
1998 Budget submission to Congress (the "Proposed Federal Budget"). The initial
version of the Proposed Federal Budget proposed 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 Jobs Protection Act of 1996.) The Proposed
Federal Budget proposed that the placed-in-service date be changed to June 30,
1997.
On August 5, 1997, President Clinton signed the Taxpayer Relief Act of 1997 (the
"Act"). In addition to the broad implications of the Act which aims to eliminate
the deficit by 2002 and provide the first general tax cut in 16 years, the Act
did not include any modification to Section 29. Hence, the June 30, 1998
deadline for placing in service synthetic fuel plants constructed pursuant to
binding contracts in place before January 1, 1997 remains intact.
14
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COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
---------------------------------------
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 5, 1997 Brandt Filtration Group, Inc. filed a complaint against the
Company in the State Court for Gwinnett County, State of Georgia. The plaintiff
also named Pacific Power & Light Company ("Pacific") as a defendant. The
plaintiff seeks $160,340 plus other unspecified damages and legal expenses. The
complaint alleges that the Company breached a contract to purchase air
filtration equipment for the Alabama project from Brandt and further alleges
that the Company acted as agent for Pacific. Pacific removed the action to the
United States District Court for the Northern District of Georgia. The Company
and Pacific have answered the complaint, denying any agency liability on the
part of Pacific. Pacific has filed a motion seeking to have the action dismissed
against it. The Company disputes the amounts claimed by the plaintiff and
intends to defend the action if a suitable settlement cannot be reached.
On June 26, 1997 Kirby Cochran, former President of the Company during the
period from September of 1995 through May of 1996, filed a complaint against the
Company in the Fourth Judicial District for Utah County, State of Utah. The
plaintiff also named unspecified John Does 1-5 as defendants. The complaint
alleges that Mr. Cochran is entitled to a declaratory judgment awarding him
options to purchase 600,000 shares of the Company's stock plus damages of
$50,000 as repayment of a purported loan. The complaint further alleges claims
of conversion, fraud, and breach of contract related to the stock options and
loan. Finally, the complaint alleges a claim for punitive damages and other
unspecified special or general damages. The Company has filed a petition to
remove the action to the United States District Court for the District of Utah.
The Company has answered the complaint, denying liability and intends to
vigorously defend the action. Further, the Company intends to file counterclaims
against Mr. Cochran.
ITEM 2. CHANGES IN SECURITIES.
Recent Sales of Unregistered Securities
The following sets forth securities issued by the Company within the past fiscal
quarter without registering the securities under the Securities Act of 1933, as
amended (the "33 Act"). 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,
notes and debentures and other securities were exempt from the registration
requirements of the 33 Act pursuant to the exemption set forth under Regulation
S of the 33 Act or Section 4(2) thereof.
On April 1, 1997, the Company granted 50,000 stock options to Max Sorensen, an
executive of the Company, which was recorded as deferred compensation and valued
at $312,500. The exercise price is $1.50 per share for 50,000 options.
On April 1, 1997, the Company granted 2,500 stock options to Vern May, a
director of the company as director compensation. The exercise price is $1.50
per share.
On April 15, 1997, the Company granted stock options to acquire 180,000 shares,
at an exercise price of $8.25 per share, to 9 employees of the Company.
On May 1, 1997, the Company granted 2,500 stock options to Joe Johnson, a
director of the Company, as director compensation. The exercise price is $1.50
per share.
On May 6, 1997, the Company issued 49,996 shares of common stock in a private
placement to three accredited investors for $299,976.
15
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COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
---------------------------------------
As described in Part I, Item 2 above, on May 5, 1997 the Company issued 140,642
shares of common stock to AJG Financial Services, Inc., an accredited investor
converting the subordinated debenture and accrued interest at a price of $8.00.
On May 19, 1997, the Company issued 50,000 shares of common stock to two
accredited investors for $90,000 in exercising of options at $1.80 per share.
On June 6, 1997, the Company issued 40,330 shares to certain principals of RAS
Securities Corp. each accredited investors valued at $8.50 per share in
settlement totaling $342,765.
Regulation S Offering. On May 26, 1997 and July 7, 1997, and in reliance on
Regulation S of the Securities Act of 1933, as amended ("Regulation S"), the
Company received funds and accepted subscriptions for the sale of 224,000 units
and 60,000 units, respectively (the "Units"), from accredited non-U.S. persons
(the "Non-U.S. Persons"). Each Unit consisted of (i) one share of Company common
stock, $0.001 par value per share (the "Common Stock"), and (ii) a warrant to
acquire one share of Company Common Stock at a price of $7.25 per share (the
"Warrants"), for a total purchase price per Unit of $6.00, or a total of
$1,704,000. The Warrants are exercisable at any time prior to the second
anniversary of their issuance. The Shares of Company Common Stock issuable under
the Warrants and the Finder Warrants (as defined below) have piggy-back
registration rights and conditional demand registration rights. The conditional
demand registration rights are triggered if within twelve (12) months from the
date of subscription, the Securities and Exchange Commission imposes an
additional holding period requirement on securities issued under Regulation S,
other than the holding period restrictions currently in effect. Doyle Capital
Resources, an Australian entity located at Level 32, Chifley Tower, Two Chifley
Square, Sydney NSW 2000 Australia ("Doyle Capital Resources"), and Aymkone Pty
Ltd, an Australian entity located at Level 4, 70 Castlereagh Street, Sydney NSW
2000 Australia ("Aymkone"), acted as finders in the sale to the Non-U.S.
Persons. As compensation for acting as finders on both subscriptions, Doyle
Capital Resources received a cash fee of five percent of the proceeds of such
offerings and Aymkone received warrants (the "Finder Warrants") to purchase
71,000 shares of Company Common Stock at a price of $7.25 per share. The Finder
Warrants are exercisable at any time prior to the second anniversary of their
issuance. Based upon representations made to the Company, Aymkone is also a
non-U.S. person and the Finder Warrants were issued in reliance on Regulation S.
ITEM 3. DEFAULTS OF SENIOR SECURITIES.
In July, 1996, the Company borrowed $700,000 from Key Bank. The loan was
personally guaranteed by seven officers, directors and employees of the Company.
The current outstanding balance on the loan, including interest and fees is
$523,940. The Company and Key Bank have previously negotiated rollovers of the
loan. The current rollover matured May 30, 1997. Key Bank has notified the
Company that it is in default of the loan. The Company is arranging with Key
Bank to pay off the loan.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 25, 1997, the Company held its annual stockholders meeting in Salt Lake
City, Utah (the "Annual Meeting"). At the Annual Meeting the stockholders
approved of : (i) the election of Raymond J. Weller, Brent M. Cook, Stanley M.
Kimball, DeLance M. Squire, Vern T. May and Joe K. Johnson as directors; (ii) an
amendment to the Company's Certificate of Incorporation to create a new class of
preferred stock, $.001 par value, with an authorized number of shares equal to
10,000,000; (iii) an amendment to the Company's Bylaws to provide for (a)
classified board of directors, (b) the minimum and maximum number of directors
on the Board, (c) the removal of directors with the vote or written consent of
stockholders representing not less than two-thirds of the issued and outstanding
stock entitled to vote and (d) increases to the size of the board of directors
with the vote or written consent of the stockholders representing not less than
two-thirds of the issued and outstanding stock entitled to vote; and (iv) the
ratification of Coopers & Lybrand LLP as independent auditors of the Company for
fiscal year ending September 30, 1997.
16
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COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
---------------------------------------
The following list summarizes the number of votes cast for, against or withheld,
as well as the number of abstentions and broker non-votes, as to each matter,
including a separate tabulation for each nominee to the board of directors.
Abstentions
ITEM (I) - Election of Directors Votes For Votes Withheld Broker Non-Votes
--------- -------------- ----------------
Raymond J. Weller 5,947,402 265,770 18,927
Brent M. Cook 6,016,399 192,795 22,905
Stanley M. Kimball 5,936,177 201,295 94,627
DeLance M. Squire 6,011,732 202,970 17,397
Vern T. May 6,012,736 200,436 18,927
Joe K. Johnson 6,035,663 196,436 0
ITEM (II) - Amendment to
Certificate of Incorporation 4,182,952 442,787 116,735
ITEM (III) - Amendment to Bylaws
(a) Classification of Board 4,430,325 231,311 72,048
(b) Number of Directors 5,962,561 132,566 86,383
(c) Removal of Directors 4,216,466 431,398 93,389
(d) Increase size of Board 4,536,750 117,430 71,089
ITEM (IV) - Ratification of 6,079,847 16,160 52,877
Independent Auditors
ITEM 5. OTHER INFORMATION
In 1995, the Company made a strategic decision to focus its efforts exclusively
on commercializing the Briquetting Technology and to divest itself of its
construction and limestone subsidiaries ("Subsidiaries"). On February 1, 1996,
the Company entered into a Stock Purchase Agreement (the Agreement) with former
principals of IME, State, CIC and Larson (Buyers) to sell all of the common
shares of the subsidiaries to the Buyers for a $5,000,000 face value 6%
promissory note (the Note). See Item 1 of the Company's Annual Report on Form
10-K for the year ended September 30, 1996 for a detailed discussion of the
terms of the sale. The Buyers have raised various contentions regarding the Note
and the Agreement. The Buyers claim that Covol is responsible to pay additional
amounts beyond the $3,500,000 provided for in the agreement. Furthermore, the
Buyers claim that the Company represented to them payment terms that are
different from the original promissory note. The Company accrued as of September
30, 1996 approximately $650,000 of additional expenses related to the
discontinued operations for the wind-down period which were paid or accrued by
the subsidiaries. The Company is investigating the claims made by the Buyers and
anticipates that an amicable settlement can be reached. However, there can be no
assurance that a settlement will be reached with the Buyers.
The results of the construction and limestone operations have been classified as
discontinued operations for all periods presented in the Consolidated Statements
of Operations. The assets and liabilities of the discontinued operations have
been classified in the Consolidated Balance Sheets as "Net assets - discontinued
operations." Discontinued operations have also been segregated for all periods
presented in the Consolidated Statements of Cash Flows.
Effective July 17, 1997, Joe K. Johnson resigned from the Board of Directors to
pursue other business interests and to allow the Company flexibility to appoint
another director in connection with future financing transactions.
17
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COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
---------------------------------------
PART II. OTHER INFORMATION
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.
3.1.2 Certificate of Amendment of the Certificate of
Incorporation dated June 25, 1997.
3.2.1 Certificate of Amendment of the Bylaws dated
May 20, 1997.
3.2.2 Certificate of Amendment of the Bylaws dated
June 25, 1997.
27.1 Financial Data Schedule.
(b) The Company filed two Current Reports on Form 8-K dated May
26, 1997 and July 7, 1997, respectively. The information
provided therein disclosed the sale of Company common stock
and warrants pursuant to Regulation S of the Securities Act of
1933, as amended.
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COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
---------------------------------------
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 1997
COVOL TECHNOLOGIES, INC.
By: /s/ Brent M. Cook
-------------------------------------------------
Brent M. Cook, Chief Executive Officer and President
By: /s/ Stanley M. Kimball
-------------------------------------------------
Stanley M. Kimball, Principal Financial Officer
19
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
COVOL TECHNOLOGIES, INC.
Covol Technologies, Inc. (the "Company"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, DOES HEREBY CERTIFY:
1. On May 20, 1997, the Board of Directors of the Company approved (i)
an amendment to the Company's Certificate of Incorporation to create a new class
of preferred stock, $.001 par value, with an authorized number of shares of
10,000,000 (the "Preferred stock"), and (ii) to submit such amendment to the
stockholders for their approval at the next annual meeting.
2. On June 25, 1997, the Company held its annual stockholders meeting
where stockholders approved of the proposal to amend the Company's Certificate
of Incorporation to create the Preferred stock (the "Stockholder Approval").
3. Effective as of the date hereof, and after giving effect to the
Board of Director's Stockholders' approval, Article V of the Certificate of
Incorporation shall be amended to provide as follows:
ARTICLE V
A. The capital stock authorized, the par value thereof, and the
characteristics of such stock shall be as follows:
================================================================================
Number of Shares Par Value Class of
Authorized Per Share Stock
- --------------------------------------------------------------------------------
25,000,000 $.001 Common
- --------------------------------------------------------------------------------
10,000,000 $.001 Preferred
================================================================================
B. The Board of Directors of the Company is authorized, from
time to time, to establish series of unissued shares of Preferred stock, to
designate each series, and to issue shares of any series then or previously
designated; and to fix and determine separately for each series any one or more
of the following relative rights and preferences:
(a) The rate of dividend payable with respect to shares
of each series and the dates, terms and other conditions on which such dividends
shall be payable;
(b) The nature of the dividend payable with respect to
shares of such series as cumulative, non-cumulative or partially cumulative.
<PAGE>
(c) The price at and the terms and conditions on which
shares may be redeemed (if applicable);
(d) The amount payable to holders of such series in
the event of involuntary liquidation of the Company;
(e) The amount payable to holders of such series in
the event of voluntary liquidation of the Company;
(f) The sinking fund provisions (if any) for the
redemption or purchase of shares;
(g) The terms and conditions on which shares may be
converted, if the shares of any series are issued with the privilege of
conversion;
(h) The voting rights (if any); and
(i) The repurchase obligations of the Company with
respect to the shares of each series (if any).
C. The Board of Directors may increase or decrease the number
of authorized shares within each series, whether or not any shares of the series
are outstanding; provided, however, that the Board of Directors may not decrease
the number of shares within a series below the number of shares within such
series that is then issued. The approval of existing Preferred stock or Common
stock stockholders shall not be required.
D. Dividends on the Preferred stock when and if declared by
the Board of Directors out of any funds legally available therefor may be
cumulative or non-cumulative, as determined by the Board of Directors. The
Preferred stock as a class shall have a preference over the Common stock as a
class as to the payment of such dividends. The relative preference between
series of Preferred stock as to the payment of such dividends may be fixed and
determined by the Board of Directors.
E. In the event of voluntary or involuntary liquidation of the
Company, the Preferred stock shall have a preference in the assets of the
Company over the Common stock, as fixed and determined by the Board of
Directors. The relative preference between series of Preferred stock may be
fixed and determined by its Board of Directors.
4. That the foregoing amendment to the Certificate of Incorporation has
been duly adopted in accordance with the provisions of Section 242 of the
General Corporation Law of the State of Delaware.
2
CERTIFICATE OF AMENDMENT
TO BYLAWS OF
COVOL TECHNOLOGIES, INC.
Pursuant to Unanimous Consent of the Board of Directors
effective May 20, 1997, Article 2, Section 8, of the Bylaws of Covol
Technologies, Inc. is amended to read in its entirety, as follows:
Section 8. Required Vote. The vote of the holders of a
majority of the shares entitled to vote and represented at a meeting at
which a quorum is present shall be the act of the Corporation's
stockholders unless the question is one upon which by express provision
of the statutes or the Certificate of Incorporation a different vote is
required, in which case such provision shall govern and control the
decision of such question. The vote required for the election of the
Directors shall be by plurality of the votes of the shares present in
person or represented by proxy at the meeting and entitled to vote on
the election of directors.
CERTIFICATE OF AMENDMENT
TO BYLAWS OF
COVOL TECHNOLOGIES, INC.
Pursuant to Unanimous Consent of the Board of Directors
effective May 20, 1997, and the action of the stockholders at the annual meeting
of the stockholders held June 25, 1997, Article 3, Section 1, of the Bylaws of
Covol Technologies, Inc. is amended to read in its entirety, as follows:
Section 1. Number, Qualification, Election and Term. The
number of directors of the Corporation shall be fixed from time to
time, within the limits specified by the Certificate of Incorporation,
by resolution of the Board of Directors; provided, however, no
director's term shall be shortened by reason of a resolution reducing
the number of directors. Directors need not be residents of the State
of Delaware, stockholders of the Corporation or citizens of the United
States. Unless provided otherwise by law, any director may be removed
at any time, with or without cause, at a special meeting of the
stockholders for that purpose. Members of the initial Board of
Directors shall hold office until the first annual meeting of
stockholders and until their successors shall have been elected and
qualified. Following the first annual meeting of stockholders, the
Board of Directors may be divided into three classes, Class I, Class II
and Class III, each class to be as nearly equal in number as possible,
the term of office of directors of the first class to expire at the
first annual meeting of stockholders after their election, that of the
second class to expire at the second annual meeting after their
election, and that of the third class to expire at the third annual
meeting after their election. At each annual meeting following such
classification and division of the members of the Board of Directors, a
number of directors equal to the number of directorships in the class
whose term expires at the time of such meeting shall be elected to hold
office until the third succeeding annual meeting of stockholders of the
Corporation. Irrespective of Article 3, Section 2, any director of any
class elected to fill a vacancy resulting from an increase in such
class hold office for a term that shall coincide with the remaining
term of the class.
Each Director shall hold office for the class term for which
he is elected and until his successor shall be elected and qualified.
Notwithstanding anything herein to the contrary, any director may be
<PAGE>
removed from office at any time by the vote or written consent of
stockholders representing not less than two-thirds of the issued and
outstanding stock entitled to vote.
The Board of directors shall have no less than five members
and no more than nine members. Notwithstanding anything herein to the
contrary, the size of the Board of Directors may not be increased
without the vote or written consent of stockholder representing not
less than two-thirds of the issued and outstanding stock entitled to
vote.
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<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1997
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