As filed with the Securities and Exchange Commission on November 16, 1998
Registration No. 333-____
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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COVOL TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 87-0547337
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
3280 North Frontage Road
Lehi, Utah 84043
(801) 768-4481
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(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
Brent M. Cook
Chairman of the Board of Directors
3280 North Frontage Road
Lehi, Utah 84043
(801) 768-4481
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(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
Copies to:
Richard T. Beard
Paul H. Shaphren
Callister Nebeker & McCullough
Gateway Tower East, Suite 900
10 East South Temple
Salt Lake City, Utah 84133
(801) 530-7300
Approximate date of commencement of proposed sale to the public:
From time to time after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: |_|
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Title of Each Class of Proposed Maximum Proposed Maximum
Securities to Be Amount to Offering Price Aggregate Amount of
Registered Be Registered Per Share(1) Offering Price(1) Registration Fee(1)(2)
---------- ------------- ------------ ----------------- ----------------------
<S> <C> <C> <C> <C>
Common Stock ($.001 5,702,420
par value) shares (3) $5.66 $32,275,697 $8,972.64
=========================== ===================== ========================== ========================== ========================
</TABLE>
(1) Calculated in accordance with Rule 457(c) on the basis of the average of the
high and low prices as of November 13, 1998 of Registrant's Common Stock as
reported by the Nasdaq National Market.
(2) Registration Fee is calculated on the basis of $278 per $1,000,000 of the
Proposed Maximum Aggregate Offering Price.
(3) Shares which may be resold by selling stockholders. No consideration will
be received by the Registrant for such shares being registered hereby.
Includes the resale of shares issuable by the Registrant on conversion of
its Series A and B Preferred Stock and on exercise of outstanding
warrants.
The Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until the
<PAGE>
Registrant shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE>
The information contained in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
Preliminary Prospectus Subject to Completion dated November 16, 1998
Prospectus
5,702,420 SHARES
COVOL TECHNOLOGIES, INC.
COMMON STOCK
This is an offering of shares of common stock of Covol Technologies, Inc.
Selling stockholders identified in this prospectus are offering all of the
shares to be sold in the offering. Covol will not receive any of the proceeds
from the offering.
The Company's common stock is quoted on the Nasdaq National Market under
the symbol CVOL. On November 13, 1998, the last reported sale price for the
Common Stock on the Nasdaq National Market was $5.69 per share.
The Company's executive offices and telephone number are:
3280 North Frontage Road
Lehi, Utah 84043
(801) 768-4481
This investment involves certain high risks. See "Risk Factors" beginning on
page 4.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
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The date of this Prospectus is _________, 1998
<PAGE>
No dealer, salesman or other person has been authorized to give any
information or to make any representation not contained in or incorporated by
reference in this Prospectus and, if given or made, such information or
representation must not be relied upon as having been authorized by the Company,
the Selling Stockholders or any other person. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such an offer in such jurisdiction. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that the information herein is correct as of any time
subsequent to the date hereof or that there has been no change in the affairs of
the Company since such date.
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TABLE OF CONTENTS
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Page
AVAILABLE INFORMATION...................................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................ 3
RISK FACTORS............................................................... 4
THE COMPANY................................................................ 8
MATERIAL CHANGES........................................................... 23
USE OF PROCEEDS............................................................ 23
SELLING STOCKHOLDERS....................................................... 23
PLAN OF DISTRIBUTION....................................................... 29
LEGAL MATTERS.............................................................. 30
EXPERTS.................................................................... 30
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information concerning the Company filed with the
Commission may be inspected and copied at the public reference facilities
maintained by the Commission at its office at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, as well as at the Regional Offices of the Commission at
Citicorp Center, 300 West Madison Street, Chicago, Illinois 60661 and Seven
World Trade Center, New York, New York 10048. Copies of such material can be
obtained from the Public Reference Section of the Commission
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<PAGE>
at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission also maintains a site on the World Wide Web (http://www.sec.gov)
which contains reports, proxy statements and other information concerning the
Company filed electronically with the Commission. Shares of the Common Stock are
traded on the Nasdaq National Market. Such reports, proxy statements and other
information can also be inspected and copied at the offices of the Nasdaq
National Market, 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed a registration statement on Form S-3 (herein,
together with all amendments and exhibits thereto, the "Registration
Statement"), under the Securities Act with respect to the securities offered
pursuant to this Prospectus. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information, reference is made to the Registration Statement and the
exhibits filed as a part thereof. Statements contained herein concerning any
document filed as an exhibit are not necessarily complete and, in each instance,
reference is made to the copy of such document filed as an exhibit to the
Registration Statement. Each such statement is qualified in its entirety by such
reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission pursuant to the
Exchange Act (File No. 0-27803) are hereby incorporated by reference into this
Prospectus: (i) the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1997, (the "Form 10-K"), (ii) the Company's Quarterly
Reports on Form 10-Q for the fiscal quarters ended December 31, 1997, March 31,
1998 and June 30, 1998; (iii) the Company's Current Report on Form 8-K dated
March 8, 1998; (iv) description of securities continued in Item 11 of the
Company's Registration Statement on Form 10/A, Amendment No. 2 dated April 24,
1996; and (v) the Company's Proxy Statement filed August 5, 1998.
All other documents filed by the Company pursuant to Sections 13(a),
13(c), 14 and 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the Offering pursuant to this
Prospectus shall be deemed to be incorporated by reference and to be a part of
this Prospectus from the date of filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a
copy of this Prospectus is delivered, upon oral or written request of any such
person, a copy of any or all of the documents incorporated herein by reference,
other than the exhibits to such documents (unless such exhibits are specifically
incorporated by reference into the information that this Prospectus
incorporates). Requests should be directed to:
Investor Relations Department
Covol Technologies, Inc.
3280 North Frontage Road
Lehi, Utah 84043
Telephone Number: (801) 768-4481.
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<PAGE>
RISK FACTORS
You should consider carefully the following risk factors and other
information in this document before investing in our Common Stock.
Some of the statements contained in this prospectus discuss future
expectations, contain projections of results of operations or financial
condition or state other "forward-looking" information. Such information can be
identified by the use of "may," "will," "expect," "anticipate," "estimate,"
"continue" or other similar words. When considering such forward-looking
statements, you should keep in mind the risk factors and other cautionary
statements in this prospectus. These statements are subject to known and unknown
risks, uncertainties and other factors that could cause our actual results to
differ materially from those contemplated by the statements.
History of Losses; No Assurance of Profit
We have incurred total losses of approximately $31,000,000 from our
beginning through June 30, 1998. Although we earned net income for the quarters
ended March 31, 1998 and June 30, 1998, revenue for these quarters may not be
indicative of future results. These two quarters included income from one-time
payments of advance license fees. We may not be profitable in the future.
Availability of Section 29 Tax Credits Not Assured
Section 29 of the Internal Revenue Code provides a tax credit for the
production and sale of qualified synthetic fuel. We received a Private Letter
Ruling (PLR) from the Internal Revenue Service (IRS) in which the IRS agrees
that synthetic fuel manufactured using Covol's technology qualifies for the
Section 29 tax credits. At least six other PLRs have been issued by the IRS to
licensees of Covol's technology. These rulings may be modified or revoked by the
IRS if the IRS adopts regulations that are inconsistent with these rulings.
Also, a PLR may not apply if the actual practice differs from the information
given to the IRS for the ruling. Therefore, tax credits may not be available in
the future, which would materially adversely impact the Company. See "The
Company -Tax Credits."
We and our licensees believe the synthetic fuel facilities built and
completed by June 30, 1998 are eligible for Section 29 tax credits. However, the
ability to claim the tax credits is dependent upon a number of conditions
including, but not limited to, the following: (i) the facilities were
constructed pursuant to a binding contract entered into on or before December
31, 1996; (ii) all steps were taken for the facility to be considered placed in
service; (iii) manufacturing procedures are applied to produce a significant
chemical change and hence a "qualified fuel"; (iv) the synthetic fuel is sold to
an unrelated party; and (v) the owner of the facility is in a position to use
the tax credits. The IRS may challenge the Company or our licensees on any one
of these or other conditions. Also, the Company or its licensees may not be in a
position to claim the tax credits.
Commercial Feasibility Without Tax Credits Not Assured
The synthetic fuel facilities that qualify under Section 29 receive
economic benefits from the tax credits in addition to the benefits, if any, from
operations. It is possible that synthetic fuel facilities that are not eligible
for tax credits cannot be built and operated profitably.
Section 29 allows tax credits expire on December 31, 2007. If the credits
are eliminated or not extended and we are unable to develop other applications
of Covol's technology, the loss of tax credits would have a material adverse
effect on the Company.
Applications of Technology
4
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We have developed and patented technologies related to the agglomeration of
wastes and by products from the coal, coke and steel industries. We have also
tested in the laboratory the agglomeration of other materials. However, to date
we have only commercialized our synthetic fuel application. The other
applications have not been commercialized or proven out in full-scale
operations. We may not be able to employ these other application profitably. See
"The Company - Covol Technology and Business Strategy."
Need for Additional Funds
We will need substantial additional funds in the near future for: (i) debt
repayments, (ii) working capital, and (iii) implementation of our business
strategy. Our cash needs will be different depending on operations of the
synthetic fuel facilities. Adequate funds may not be available when needed or on
terms acceptable to us. Insufficient funds would have a material adverse effect
and may cause us to delay, scale back, or eliminate research and product
development programs or other business initiatives. See "The Company Business
Strategy."
Dependence on Third Parties
We depend on licensees to commercially employ our technology. The payments
received by us as royalties and binder sales are proportionate to the level of
production and sales of the synthetic fuel. While we believe we have contracted
with quality licensees, our licensees may not successfully operate the
facilities or may operate them in a way that does not maximize payments to us.
See "The Company - Synthetic Fuel Manufacturing Facilities."
Acceptance of Products
We are uncertain of the market acceptance of products manufactured using
Covol's technology. The synthetic fuel product competes with standard coal
products. Moisture control, hardness, special handling requirements and other
characteristics of the synthetic fuel product may affect its marketability. For
these and other possible reasons, customers may not purchase the synthetic fuel
products made with our technology. While some licensees have secured contracts
for the sale of a portion of their production, the licensees may not secure
market contracts for their synthetic fuel products at full production levels.
Supply of Raw Materials
We and our licensees have not secured all the raw materials needed to
operate the facilities for the full term of the tax credit. Some of the owners
of facilities are constructing coal washing facilities to provide feedstock and
some of the facilities may require relocation during the term of the credit in
order to obtain necessary raw materials for operation. Although we believe there
are ample feed stocks available for the synthetic fuel facilities, raw materials
may not be available at reasonable commercial terms. See "The Company - Supply
of Raw Materials."
Dependence upon Key Personnel
We rely on the services of key individuals to operate our business. We may
not have sufficient management to implement the increased business envisioned by
our business strategy.
Our success depends on: (i) the continued work of key employees and (ii)
our ability to attract new personnel to implement our business strategy. We have
employment agreements with some of our executives
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<PAGE>
which may be terminated only for good reason. The competition for qualified
personnel is intense, and the loss of services of certain key personnel could
adversely affect our business.
Government Regulation
We believe the synthetic fuel facilities satisfy regulations regarding the
discharge of pollutants into the environment. We or the facility owners may be
subject to fines for any violation of regulations due to design flaws,
construction flaws, or operation errors. A violation may prevent a facility from
operating until the violation is cured. We or our licensees may be liable for
environmental damage from facilities not operated within environmental
guidelines. See "The Company - Government Regulation."
Competition
We experience competition from: (i) other alternative fuel technology
companies and their licensees, (ii) companies that specialize in the disposal
and recycling of waste products generated by coal, coke, steel and other
resource production, and (iii) traditional coal, fuel, and natural resource
suppliers. Competition may come in the form of the licensing of the competing
technologies or in the marketing of end products. We currently have limited
experience in manufacturing and marketing. Many of our competitors have greater
financial, management and other resources than we have. We may not be able to
compete successfully. See "The Company - Competition."
Limitation on Protection of Intellectual Property
We rely on patent, trade secret, copyright and trademark law,
confidentiality agreements and other security measures to protect our
intellectual property. These rights or future rights or properties may not
protect our interests in present and future intellectual property. Competitors
may successfully contest our patents or may use concepts and processes which
enable them to circumvent our technology. See "The Company - Proprietary
Protection."
Technological Change
Alternative fuel sources and the recycling of waste products are the
subject of extensive research and development. If a competitive technology were
developed which greatly increases the demand for waste products or reduces the
costs of alternative fuels or other resources, the economic viability of our
technology would be adversely affected.
Furthermore, we may not be able to develop or refine Covol's technology to
apply to specific current needs for synthetic fuel or other applications that we
have not yet commercialized as discussed in our business strategy. See "The
Company - Business Strategy."
Operations Liability Insurance
We are exposed to potential operational liability risks which are inherent
in the manufacturing of industrial products. While we have placed insurance with
the intent of covering this risk, there can be no assurance that operation of
these facilities will not expose us to operational liabilities beyond our
insurance coverage.
Absence of Dividends
6
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We have never paid and do not intend to pay dividends on Common Stock in
the foreseeable future. In addition, dividends on Common Stock cannot be paid
until cumulative dividends on our outstanding Preferred Stock are fully paid.
Possible Volatility of Share Price
Our Common Stock is traded on the Nasdaq National Market System. The market
for our Common Stock has been volatile. Factors such as announcements of
production or marketing of synthetic fuel from the synthetic fuel facilities,
technological innovations or new products of Covol or our competitors,
government regulatory action, litigation, patent or proprietary rights
developments, and market conditions in general could have a significant impact
on the future market for the Common Stock. You may not be able to sell Common
Stock at or above your purchase price.
Common Share Rights Are Subject to Preferred Share Rights
We have issued Preferred Stock that has preferential dividend rights, which
dividends will accumulate if unpaid. Dividends on Common Stock are prohibited
until the preferential rights of the Preferred Stock are satisfied. If the
Company is liquidated, the Preferred Stockholders are entitled to liquidation
proceeds after creditors but before Common Stockholders. The Preferred Stock has
the right to convert to Common Stock, and is redeemable by the company.
Future Sales of Common Stock
As of September 30, 1998, we had approximately 16,650,000 shares
outstanding or issuable upon conversion of warrants, options and convertible
preferred stock. Approximately 3,960,000 shares are issuable upon exercise or
conversion at prices that currently exceed the market price. This number does
not reflect additional shares we may issue pursuant to anti-dilution provisions.
We have the authority to issue additional Common Stock and Preferred Stock and
to issue options and warrants to purchase shares of Common Stock and Preferred
Stock without stockholder approval. We may issue stock in the future at values
below current market prices which would cause dilution.
Dilution from Convertible Securities, Warrants, and Options
As of September 30, 1998, the Company had commitments to issue
approximately 2,335,750 shares of Common Stock to current and prior management,
consultants, advisors and board of director members, under option agreements.
Approximately 1,144,750 options are exercisable at prices below current market
price. To the extent the stock options are exercised, stockholder interests in
the Company will be diluted. If the market value of the Common Stock decreases
significantly, the offering price in the Company's private placements or public
offerings may decrease causing dilution of ownership to other stockholders.
Exercise of options or warrants may have an adverse effect on the trading price
and market of the Company's Common Stock. A significant portion of underlying
shares are subject to registration rights which may affect our ability to raise
additional capital.
Potential Conflicts of Interest
We intend to continue to commercialize Covol's technology through
partnerships or limited liability companies of which the Company may be a
general partner or manager. There are risks involved in commercializing the
technology through entities that have other investors. We may experience
conflicts of interest in connection with our projects. For example, the
Company's relationship as general partner of a
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limited partnership owning and operating a facility may be in conflict with the
interests of the Company's stockholders.
Past Compliance Issues
In 1997 we received a notice of violation and order of compliance from the
State of Utah, Division of Air Quality alleging improper asbestos handling. We
signed a settlement with the state and paid a fine in the amount of $11,000. In
1997 the U.S. Environmental Protection Agency began its own investigation. The
U.S. Attorney has proceeded with a grand jury inquiry. The outcome of this
matter may have adverse effects on the Company.
THE COMPANY
Covol Technologies Inc. ("Covol" or the "Company") is a technology
development company focused on "Recycling Yesterday's Waste into Tomorrow's
Resources."
Company History
The Company was originally incorporated in Nevada in 1987 under the name
Cynsulo, Inc. In 1988, the Company consummated an initial public offering of its
Common Stock. Subsequently, the Company acquired all of the issued and
outstanding shares of McParkland Corporation and changed its name to McParkland
Properties, Inc. ("McParkland"). McParkland invested in discounted notes and
contracts through the Federal Deposit Insurance Corporation. The purchase of
McParkland was rescinded in February 1989, and the Company's name was changed to
Riverbed Enterprises, Inc. In 1990, the Company's focus was changed to the
growing and marketing of certain agricultural products. In 1991, the Company
acquired technology consisting of binding agents used to make briquettes. From
1991 to 1995 the Company focused on the research and development of better and
stronger binding agents principally for iron reverts, coal and coke. The
Company's name was changed to Enviro-Fuels Technology in 1991, to Environmental
Technologies Group International in 1994, and to Covol Technologies, Inc. in
1995, at which time the Company was reincorporated in Delaware.
In 1995, management of the Company recognized the applicability of its
technology to produce synthetic fuel. Since 1996, the primary focus of the
Company has been on developing and commercializing the synthetic fuel
technology.
Industry Background
As a result of comprehensive efforts by government and business to address
the environmental implications of business as well as recognizing the need for
efficiently utilizing diminishing resources, the recycling industry was
established to recycle, recover and/or enhance by-products and waste streams.
Covol has developed a family of technologies for agglomerating and upgrading
fine materials from wastes and by-products to capture their inherent resource
value (the "Company Technologies").
Coal mines, ferrous and non-ferrous metals producers, and other industries
produce waste by-products. Notwithstanding the significant potential value of
such waste by-products, these industries have not been able to implement
cost-effective processes whereby such resources can be captured and utilized.
Storage and disposal of these by-products is costly. The Company Technologies
are designed to process by-products from the coal and metals industries into
valuable fuels and resources. The Company's primary focus over the past two
years has been the commercialization of the coal applications of the Company
Technologies.
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The Company Technologies can be used to transform coal fines into a usable
fuel. Coal fines are small particles of coal produced as a waste by-product of
coal production. Coal fines can be found throughout coal producing regions of
the United States and the world. A recent study of the coal industry estimated
that there are greater than 2 billion tons of coal fines residing in waste ponds
and landfills in the United States alone. Millions of tons are added to this
amount each year. Although coal fines have significant inherent fuel value, they
present recovery and handling challenges that make it difficult to capture that
value. The Company's coal technology molecularly bonds the coal fines into a
formed fuel. Because this process is accomplished through a significant chemical
reaction, the resulting product is classified as a "synthetic fuel" within the
meaning of Section 29 of the Internal Revenue Code (the "Code"), and is eligible
for significant tax benefits. The synthetic fuel may be more easily handled and
transported. Depending upon the coal fines used as feedstock, the composition of
the fuel varies in its Btu, ash, sulfur and other content. The end markets for
the synthetic fuel are as divergent as the markets for coal. End users of
synthetic fuel may require different types and quality of fuel. As the
composition of coals differ, the technology may be customized to address the
specific needs or desired characteristics of the prospective customer.
The Company Technologies can be used to transform coke breeze into usable
coke. Coke is required as a fuel to melt and reduce iron oxides into metallic
iron. Coke, which is processed metallurgical coal, is the primary material which
is reasonably economical in terms of not only being a reducing agent in the iron
making process but a fuel source as well. Current U.S. production of coke is
approximately 22 million tons (based on U.S. Department of Energy estimates).
Coke breeze is a fine residue by-product resulting from the production, handling
and storage of coke and is marketable in its "breeze" state because of its high
carbon and Btu value. In tests, the Company has succeeded in agglomerating coke
breeze into hard briquettes that show the product's potential to withstand the
weight, heat and other environmental factors inside of metal making furnaces,
demonstrating the potential to capture incremental value above briquette
processing costs.
The Company Technologies can be used to transform iron reverts into usable
iron. Mill scale, bag-house dust, furnace sludges, blast furnace dust and other
iron rich materials ("reverts") are all waste by-products created by steel
producers. These by-products produce environmental problems for the steel
industry. Notwithstanding the potential value in these revert materials, the
steel industry historically has not developed efficient processes whereby these
valuable resources can be economically captured and utilized. Approximately 775
million tons of finished steel are consumed annually in the world with the U.S.
producing approximately 100 million tons. The capture of even a fraction of the
waste and by-product of this steel production in the U.S. alone will provide
millions of tons of feedstock material for processing. On a test basis, the
Company Technologies have been demonstrated to be capable of producing
briquettes from iron revert. Such briquettes can be further processed in metal
reducing furnaces to form iron, a substitute for scrap or pig iron, a common
form of feed material used in the steel industry.
Additional fuel or resource by-products which the Company has identified
and tested with the Company's technologies include: molybdenum, silicon carbide,
grinding swarf, lead dross, zinc oxide, titanium dioxide, phosphorous, and
charcoal. Briquettes containing these by-products would be marketed to the core
industry such as ferrous and non-ferrous metals producers.
Except for the synthetic fuel application, the applications of the Company
Technologies listed above have not been applied in commercial operations. No
assurance can be given that the Company will be able to apply these applications
profitably.
Company Technologies
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The Company has developed a family of technologies designed to agglomerate
and process wastes and by-products that are in a fine particulate state into
usable fuels and resources in the form of briquettes, pellets or extrusions.
These technologies provide a methodology by which fuels or resources may be
"engineered" with enhanced value-added qualities, such as moisture reduction,
elimination or neutralization of pollutants (e.g., sulfur dioxide and nitric
oxide), improvement of handling strength, reduction of non-combustible
materials, and manufacture into uniform shapes or sizes to maximize efficiencies
in combustion or in processing. The resulting products manufactured using the
Company Technologies are broadly categorized as "Engineered Fuels" and
"Engineered Resources" and can be marketed to utilities, ferrous and non-ferrous
metal producers, and other major industrial users.
The fine by-products and waste materials in the form of dust, sludges, and
fines such as coal fines, iron reverts and coke breeze, are chemically bonded
together. In simplified terms, the Covol process takes the feedstock (wastes or
other resource rich by-products) to be bonded and mixes them with chemical
reagents. The mixed materials are conveyed into a briquetter or a pelletizer or
an extruder which utilizes pressure in conjunction with a chemical reaction to
shape the material into the desired size and density required for the specific
application. The materials may be further processed to meet specific market
requirements.
The chemical binding agents used in synthetic fuel production are patented
and the resulting proprietary products are produced and sold by other parties
under contract with the Company. The Company has contracted with Dow Chemical
Company to produce chemical binder materials for the production of synthetic
fuel made from coal fines. Substantially all of the equipment and machinery used
in the Covol process is considered standard or "off-the-shelf" and is
commercially available both domestically and internationally.
The Company has been issued seven U.S. patents and four foreign patents and
has other U.S. and foreign patents pending. The patented technology principally
relates to reverts, coke, coal and other carbonaceous materials. The Company is
in the process of expanding the existing patents and preparing applications for
new patents attributable to related waste recovery applications. See "The
Company - Proprietary Protection."
Business Strategy
The Company Technologies represents the foundation for the Company's
business strategy. The Company believes that its success is dependent upon its
ability to adapt and commercialize its technologies to the "engineering" of
industrial wastes and by-products into value-added fuels and resources. The
Company has divided its strategy into general areas it terms as "the four
pillars of strength", including Engineered Fuels, Engineered Resources,
Licensing and Technology Transfer and Strategic Acquisitions.
Engineered Fuels. Engineered fuels include fuels recovered or enhanced
primarily from carbonaceous materials. The Company Technologies provides a use
for fuel-rich wastes and by-products by agglomerating them for improved
handleability and processing, and making such modifications as may be required
for a given application of the resulting fuel (e.g., reduced moisture, increased
hardness, enhanced Btu value). The Company's initiatives in engineered fuel
includes applications of its technology in the manufacture of briquetted
synthetic fuel, coke breeze and silicon carbide.
For the past two years the Company's business strategy has been focused
almost exclusively upon synthetic fuel. There are currently 24 synthetic fuel
facilities located in 8 states that are utilizing the Company's synthetic fuel
Technology. Twenty of the facilities are owned by unaffiliated third parties and
four are currently owned by the Company. Two of the four facilities owned by the
Company are under option
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<PAGE>
to sell to royalty paying licensee candidates and the Company is pursuing the
sale of the remaining two facilities.
Most of the synthetic fuel facilities were initially placed into operation
in the second calendar quarter of 1998 and are currently in the process of
ramping up production and securing off-take contracts for product sales. The
Company is working with its licensees in securing coal fines feedstock, fine
tuning production and determining formulations of binding materials to produce
optimal marketable end products. The Company and its licensees are also in the
process of securing marketing contracts for the synthetic fuel. Several of the
owners of facilities are building or contemplating building wash plants to wash
the coal fines which are then processed into synthetic fuel. The securing of
feedstock, refinement of production and product quality and the marketing of the
synthetic fuel product all have a direct bearing on the amount and timing of
royalties from the synthetic fuel facilities. Accordingly, optimizing the
production of these facilities is currently the Company's highest priority.
The Company has received advance license fees attributable to most of the
24 synthetic fuel facilities. In the future, most of the revenues attributable
to such facilities are expected to come from royalties that are tied to
production and sale of synthetic fuel pursuant to licensing agreements in place.
The Company also expects to generate net revenues from the sale of binder
materials to the facilities. The Company also intends to sell its currently
owned synthetic fuel facilities. However, the Company may retain an ownership
interest in certain facilities to optimize after-tax returns to the Company.
The Company believes it is possible that the Company's technologies can be
applied profitably in the agglomeration of coal fines into synthetic fuel
without the benefit of a tax credit. There are millions of tons of coal fines in
the U.S. and internationally that could be washed and briquetted, and, in the
opinion of the Company, sold at a reasonable profit above fines purchase and
processing costs. Additionally, the Company Technologies are well-adapted to the
processing of "ultra fines", the face powder sized coal fines created in
preparing coal for use. Ultra fines can be recovered by equipping coal
preparation facilities with modern float cell technology. These ultra fines have
historically been slurried into waste impoundments and, depending upon the
preparation facility, might constitute as much as 10% of the coal product
processed. The Company Technologies allow for the agglomeration of such fines in
order to remove the high levels of moisture these fines contain and transforms
the fines into a form where they can be handled and sold. Finally, there are
certain coals with high inherent moisture levels (e.g., Powder River Basin
Coals). The processing of these coals with the Company Technologies may reduce
the moisture levels to enhance Btu values and combustion efficiencies, while
reducing the transportation costs of fuel. The Company intends to aggressively
pursue the synthetic fuel applications referred to above and similar coal
applications.
Another engineered fuel application the Company is pursuing is coke. Coke
is processed metallurgical coal which serves as both a fuel as well as a
reducing agent in iron and steel making. Coke "breeze" is a fine particle
by-product resulting from the production and handling of coke. The agglomeration
of coke breeze into briquettes that are fabricated to withstand the rigors of
handling, heat and weight in metal making furnaces results in a significant
value-added fuel and resource. The Company has patented technology and is in the
process of patenting additional technology related to coke processing. The
Company has acquired property where coke and coke breeze has been landfilled.
Covol intends to attempt to recover this coke and to briquette a portion of it
for use as a fuel as described above.
Silicon carbide is a product manufactured from a blend of carbonaceous
materials and high silica sand. In addition to its principle use in the
abrasives industry, silicon carbide is also used as an alloying agent and a
high-quality fuel in specialized metal making applications. This application is
covered under existing and
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applied-for patents. The Company has not yet tested the agglomeration of silicon
carbide in a full-scale operation.
Engineered Resources. Steel mills, nonferrous metal producers and other
mineral industries produce wastes and by-products that may contain valuable
unrecovered resources. Furthermore, such wastes often create environmental
compliance, storage and disposal problems. The Company's technologies provide a
methodology whereby these waste materials and by-products may be processed to
extract inherent resources, to transform the materials into a form that
facilitates the extraction of inherent resources, or to enhance the materials
with qualities that add value or modifies the resource materials for alternative
uses. The resulting products are collectively referred to as "engineered
resources." The Company has not yet commercially applied the Company's
technologies in engineered resources. However, the Company has devoted
significant research and development and capital in improving and perfecting its
technology for these applications, particularly in the processing of iron revert
materials.
During the steel-making process, steel mills produce, among other waste
by-products, revert materials, which are small particles containing iron-rich
materials. The Company Technologies are able to bind iron reverts into
briquettes which may be further processed in reducing furnaces to reclaim the
iron and other materials. The Company believes that products produced from iron
revert could be marketed at prices which are competitive with other sources of
iron and that this technology will be attractive in addressing the environmental
issues surrounding the disposal of waste by-products generated in the steel
making process.
The Company will seek to enter into collaborative arrangements with steel
and iron producers to build, equip and operate briquetting and processing plants
on-site at the producers facilities. The Company believes that such arrangements
will benefit both the Company and the metal producers because they will: (i)
provide the Company with an ongoing supply of inexpensive revert materials while
ensuring a ready customer for the briquettes produced, (ii) provide the steel
producer with an economical means to dispose of waste materials while providing
a ready source of briquettes and/or iron feedstock; and (iii) minimize
transportation costs for waste by-products, raw materials and briquettes,
thereby increasing the economic competitiveness of the Company's products.
The Company has developed and tested its technologies with other fine
particulate wastes and by-products, including: molybdenum, titanium dioxide,
grinding swarf, lead dross, zinc oxide and phosphorous. The Company intends to
further evaluate these and other engineered resource applications.
Licensing and Technology Transfer. The Company believes that the Company's
technologies includes valuable intangible properties in the form of patents,
processes, formulations and know-how. The Company intends to devote significant
human and capital resources in the continued development and refinement of
various applications of these technologies. The Company intends to augment its
efforts through technical support from major suppliers of binding materials. The
Company has entered into licensing agreements with third parties for the use of
its synthetic fuel technology. The Company intends to actively pursue additional
licensing, joint venture and other collaborative arrangements with coal, coke,
ferrous and non-ferrous metals producers and other resource producers to utilize
the Company's technologies in recycling, recovering or enhancing fuels and
resources from wastes and by-products, both domestically and worldwide.
Strategic Acquisitions. Covol has a unique opportunity to pursue
acquisitions that are synergistic with the Company's financial and ecological
objectives and initiatives. The Company Technologies may be applied to waste
streams that are of little or no value. When coupling the value-added dimensions
of the technologies with the tax benefits from Company owned qualified synthetic
fuel facilities, the Company has the capability of capturing significant
additional financial returns from prospective acquisition targets. The
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<PAGE>
Company intends to pursue possible acquisitions of businesses aligned to the
industries in which the Company's technologies may be applied.
The Company occupies a prominent position in the synthetic fuel industry.
The Company intends to broaden its position in this industry and other resource
industries through the acquisition or licensing of technologies that are
complementary to the Company Technologies.
Tax Credits
Section 29 of the Code provides a credit (the "Section 29 Credit") against
regular federal income tax with respect to sales of qualified fuel to an
unrelated party. Where more than one person has an interest in a qualified
facility, the Section 29 Credits generated by the facility are allocated
pursuant to the proportional interests of such persons in the facility.
In order to qualify as a solid synthetic fuel produced from coal for
purposes of the Section 29 Credit, the produced fuel must differ significantly
in chemical composition, as opposed to physical composition, from the
alternative substance used to produce it. The Company has received a Private
Letter Ruling ("PLR") from the IRS in which the IRS, based on representations
made to it by the Company, agreed that the synthetic fuel technology produces a
significant chemical change to coal fines and this qualifies the end product as
a solid synthetic fuel. Accordingly the IRS concludes, based on the facts
presented to it, that: (i) the Company, with the use of its patented process,
produces a "qualified fuel" within the meaning of Section 29 of the Code; and
(ii) assuming the other requirements of Section 29 are met, the sale of the
"qualified fuel" will entitle the Company to claim the Section 29 Credit in the
taxable year of sale. In its ruling, the IRS noted that no temporary or final
regulations pertaining to one or more of the issues addressed in the PLR have
been adopted and that the PLR will be modified or revoked by the adoption of
temporary or final regulations to the extent the regulations are inconsistent
with any conclusions in the PLR. The IRS notes, however, that a PLR is not
revoked or modified retroactively, except in rare and unusual circumstances,
provided certain criteria are satisfied, including that: (i) there has been no
misstatement or omission of material facts, (ii) the facts at the time of the
transaction are not materially different from the facts on which the PLR was
based, (iii) there has been no change in the applicable law, (iv) the PLR was
originally issued for a proposed transaction and (v) the taxpayer directly
involved in the PLR acted in good faith in relying on the PLR, and revoking the
PLR retroactively would be to the taxpayer's detriment. The Company received its
PLR in September 1995. At least six other PLRs covering twelve of the synthetic
fuel facilites, have been obtained by third parties in connection with licenses
of the Company's technology. However, all PLRs are only binding with respect to
the specific projects addressed in the PLR and may only be relied on by the
party that has obtained the PLR.
The Section 29 Credit is subject to the passive activity rules of Section
469, and therefore may not be available to individuals and closely held
corporations.
The Section 29 Credit is equal to approximately $6.10 in 1997 dollars for
each oil barrel equivalent ("OBE") of the qualifying fuel produced and sold.
This equates to approximately $20.00-$28.00 per ton of synthetic fuel
briquettes, depending upon the Btu content. The OBE is defined generally as an
amount of fuel having a 5.8 million Btu content. The Section 29 Credit allowed
may not exceed the taxpayer's regular tax liability reduced by certain other
credits. The credit cannot be utilized to offset the Alternative Minimum Tax.
The Section 29 Credit was designed to provide protection for qualifying
fuels against market price declines, and it is therefore subject to a phaseout
(under an annually adjusted formula) after the unregulated
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oil price reaches specified levels. In 1997 dollars, the credit would have
phased out had the reference price for oil exceeded $47.78 per barrel, but the
reference price determined for 1997 was $18.92 and no phaseout occurred. There
presently is no reference price for 1998. The credit is also subject to
reduction insofar as an otherwise qualifying facility benefits from grants or
subsidized financing provided by federal, state or local governments, or from
tax-exempt bond financing.
Section 29 of the Code contains no provision for carryback or carryforward
of Section 29 Credits. Once earned, the credits are not subject to subsequent
recapture. By virtue of the various limitations and other factors described
above, there can be no assurances that any particular amount of Section 29
Credit will be allowable and usable.
During 1996, certain of the time periods applicable to the Section 29
Credit were extended. The Section 29 Credit will, under present law, be
available for sales of qualified fuels completed before January 1, 2008 to the
extent attributable to production from facilities placed in service by June 30,
1998, provided that such facilities were constructed pursuant to a binding
written contract in effect as of December 31, 1996.
Synthetic Fuel Manufacturing Facilities
The following table represents a summary of the twenty four synthetic fuel
manufacturing facilities constructed and placed in operation before June 30,
1998 by the Company and its licensees.
[INTENTIONALLY LEFT BLANK]
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<TABLE>
<CAPTION>
SYNTHETIC FUEL MANUFACTURING FACILITIES
Name of Facility No. of Location Owner/Licensee2 Operator Annual Rated
Plants1 Capacity
(tons)3
- - -------------------------- --- ---------------------- ---------------------------- --------------------- ----------
<S> <C> <C> <C> <C>
Utah Synfuel #1 1 Price, Utah Coaltech No. 1 L.P.4 Company 360,000
Carbon Synfuel 1 Price, Utah Company5 Company 360,000
Mojave Synfuels 1 Laughlin, Nevada Savage Industries Inc. Flyash Haulers, Inc. 280,000
Birmingport 1 Mulga, Alabama Birmingham Syn Fuel, L.L.C.6 Birmingham Syn Fuel, 360,000
L.L.C.
Brookwood 1 Brookwood, Alabama PacifiCorp Syn Fuel, L.L.C7 PacifiCorp Syn Fuel, 360,000
L.L.C.
Pumpkin Center #1 & #2 2 Flat Creek, Alabama PacifiCorp Syn Fuel, L.L.C.5 PacifiCorp Syn Fuel, 720,000
L.L.C.
Norton 1 Norton, Virginia PC Virginia Synthetic Fuel Constellation 600,000
#1, L.L.C.
Chelyan 1 Chelyan, West Virginia PC West Virginia Synthetic Constellation 600,000
Fuel #1 L.L.C.
Muddlety 1 Muddlety, West Virginia PC West Virginia Synthetic Constellation 600,000
Fuel #2 L.L.C.
Eckman 1 Eckman, West Virginia PC West Virginia Synthetic Constellation 600,000
Fuel #3 L.L.C.
Appalachian Synfuel 2 Peccus, West Virginia Appalachian Synfuel, L.L.C. AT Massey 720,000
Mountaineer Synfuel 1 Tallmansville, West Virginia Company8 Anker 360,000
Pocahontas Synfuel 1 North Fork, West Virginia Company Company 360,000
Ginger Hill 1 Ginger Hill, Pennsylvania Ginger Hill Synfuels, L.L.C. Maple Creek Mining 300,000
Robena 1 Paisley, Pennsylvania Robena, L.L.C. Consolidation Coal 580,000
Commonwealth Synfuel 1 Karthaus, Pennsylvania Company River Hill Coal 360,000
Pennsylvania Synfuel Project 1 Somerset, Pennsylvania Somerset Fuels, L.L.C. Somerset Fuels, L.L.C. 600,000
USA Coal, #1, #2, #3, & #4 4 Pawnee, Illinois A.J.G. Financial Services, Inc. USA Coal 1,440,000
Pleasant Ridge 1 Alledonia, Ohio Pleasant Ridge Synfuels, L.L.C. Ohio Valley Coal 340,000
-- ----------
Total 24 9,900,000
- - ------------------------------------
</TABLE>
1 A plant is the finished product from a binding construction agreement
entered into on or before December 31, 1996 to construct a synthetic fuel
manufacturing facility.
2 Most owners/licensees are special purpose entities themselves owned by
one or more other companies. The Company intends to sell all or part of each
facility that the Company owns. The Company has no current ability to use the
potential tax benefits that the Company's facilities can produce.
3 This is an amount as engineered and determined by equipment
manufacturers. Most facilities are not yet operating at rated capacity and no
facility has operated for a 12-month period. There is no assurance that the
facilities will operate at capacity in the future.
4 Coaltech No. 1 L.P. ("Coaltech") consists of AJG Financial Services,
Inc., (a wholly-owned subsidiary of Arthur J. Gallagher & Co.) and Square D
Company (a wholly-owned subsidiary of Groupe Schneider), as limited partners,
and the Company as 1% general partner. The Company has entered into an operating
agreement with Coaltech to operate the Utah Synfuel #1 facility.
5 The Company has granted Coaltech an option to purchase the facility. See
"Business - Sale of Facilities."
6 Birmingham Syn Fuel, L.L.C. is an affiliate of PacifiCorp Financial
Services, Inc.
7 PacifiCorp Syn Fuel, L.L.C. is an affiliate of PacifiCorp Financial
Services, Inc.
8 The Company granted Mountaineer Synfuel, L.L.C. an option to purchase the
facility. The purchase option transaction for the Mountaineer facility provides
that the Company is the managing member of Mountaineer Synfuel, L.L.C. See
"Business - Sale of Facilities."
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Company Contracts. Consistent with Section 29 requirements, in December
1996 the Company entered into fourteen design and construction agreements (the
"1996 Construction Agreements") for the design and construction of new synthetic
fuel manufacturing facilities each having capacity of approximately 360,000 tons
per year. Depending upon the specific agreement, the contractor was either The
Industrial Company ("TIC"), CEntry Constructors & Engineers, PICOR or Centerline
Engineering Corporation ("Centerline"). The PICOR contracts were part of a joint
venture with Savage Industries. The 1996 Construction Agreements, among other
things, required that the plants be placed in service by June 30, 1998.
The Company obtained financing and successfully constructed five facilities
from the 1996 Construction Agreements. Of these, one was built by TIC for the
Company and sold to Birmingham Syn Fuel, L.L.C. (a special purpose entity owned
by PacifiCorp Financial Services, Inc.), two were built for the Company by
Centerline and are under option for sale (to Mountaineer Synfuel, L.L.C. and to
Coaltech No. 1 L.P.) and two were built by TIC and are still for sale by the
Company (Pocahontas Synfuel and Commonwealth Synfuel). See "The Company - Sale
of Facilities."
The Company assigned four other 1996 Construction Agreements to licensees
and those licensees successfully constructed four facilities as follows:
Fluor Corporation. The Company assigned two of the 1996 Construction
Agreements with Centerline to Appalachian Synfuel L.L.C. ("Appalachian"), a
wholly owned subsidiary of Fluor Corporation. The facilities were built at A.T.
Massey Coal Company, Inc.'s ("A.T. Massey") Marfork Prep Plant Site near Peccus,
in Boone County, West Virginia. In conjunction with the assignment of the two
contracts, the Company entered into a license agreement with Appalachian for the
use of the Company's technology. Under the agreement, the Company has received
an advance license fee. A quarterly license fee is also to be paid based upon
the Btu of product produced and sold up to a prescribed amount of production per
year. The Company also granted Appalachian the right to pay a lump sum payment
for the facilities, in lieu of quarterly license fees over the term of the
agreement. The Company will provide binder to the facility on a cost plus basis.
Pelletco Corporation. The Company assigned two of the 1996 Construction
Agreements with Centerline to affiliates of Pelletco Corporation. One contract
was assigned to Pleasant Ridge Synfuels, L.L.C. which constructed a facility in
Alledonia, Ohio. One contract was assigned to Ginger Hill Synfuels, L.L.C. which
constructed a facility at Ginger Hill, Pennsylvania. In connection with these
two facilities, the Company entered into technology license and binder sales
agreements providing the Company with advanced license fees and quarterly
license fees equal to 50% of the licensees' net cash flow. The Company will
provide binder to the two facilities on a cost plus basis.
Unused Contracts. The Company did not build facilities under five of its
fourteen Construction Agreements, including the two PICOR contracts as part of a
joint venture with Savage Industries. The 1996 Construction Agreements provided
for penalties if the construction was not pursued by the Company. The Company
accrued this liability during the fiscal year ended September 30, 1997 and the
remaining liability at September 30, 1998 is $954,000.
Additional Licensed Facilities. In addition to the nine facilities
constructed under the Company's 1996 Construction Agreements, the Company
licensed its technology to eight licensees for use at fifteen facilities
constructed by these licensees.
In total, the Company has licensed or constructed plants using the
Company's synthetic fuel technology at 24 synthetic fuel facilities that operate
at 18 locations in the Rocky Mountain, Southern Appalachia, Central Appalachia,
Northeast Appalachia, Northwest Appalachia, and Illinois Basin primary
coal supply regions of the United States.
A facility generally consists of a conditioner and binder additive and
mixing system, agglomeration equipment, a product dryer, and other supporting
systems. However, each facility was individually
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<PAGE>
engineered and constructed, including systems and components specially selected
by the respective owners, so that there is variation in features from facility
to facility.
License and Binder Supply Agreements. All non-Company entities that have
constructed or own facilities using the Company Technologies have entered into a
technology license and binder supply agreement with the Company. Most license
agreements provide for an advance license fee of $1.39 per ton of rated capacity
(e.g. $500,000 for a plant with 360,000 annual tons of capacity), payable upon
reaching project milestones. The Company has received the majority of its
advanced license fees. In addition, pursuant to the license agreement, the
licensee pays a quarterly earned license fee at a prescribed dollar amount
multiplied by the amount of Btus in the product produced and sold during the
calendar quarter. The prescribed dollar amount is subject to adjustment based
upon the "inflation adjustment factor" as set forth in Section 29 of the Code.
In some cases, the amount to be paid is subject to adjustment to the extent that
licensees incur an operating loss on the production and sale of synthetic fuel
(exclusive of the amount licensee pays as a license fee for the use of the
technology). Some license agreements also provide for a goal fee based on time
schedules and production amounts. The license agreements generally have a term
until the later of (i) January 1, 2008 or (ii) the corresponding date after
which tax credits may not be claimed or are not otherwise available under
Section 29 of the Code.
The Company also agrees, pursuant to the binder supply agreements, to
provide binder material to licensees for the manufacture and production of
synthetic fuel. The price for the binder sold to the licensees falls into two
categories: (i) a fixed price, or (ii) an amount equal to the Company's cost
plus a prescribed mark-up. In some cases, the mark-up may be reduced to the
extent the licensee incurs a loss on the production and sale of synthetic fuel,
but not below the Company's cost for such binder materials. The binder is
manufactured by Dow Chemical Corporation ("Dow") for the Company utilizing the
Company's patented and proprietary technology. The Company arranges with Dow for
shipping of the binder directly to the facilities.
Company Synthetic Fuel Facility Operations. The Company is the operator at
three facilities: Utah Synfuel #1, Carbon Synfuel, and Pocahontas Synfuel.
Because Utah Synfuel #1 is not owned by the Company, the Company has an
operating agreement with the owner, Coaltech. The operating agreement provides
that the Company will act as operator of the facility for a quarterly fee based
upon the amount of synthetic fuel produced and sold per year. The Company cannot
predict with any certainty the amount of fees that may be generated under its
operating agreement.
The Company has contracts with two other companies to operate the Company's
facilities at Commonwealth Synfuel and Mountaineer Synfuel. At the Commonwealth
location, River Hill Coal Company is the operator of the facility, and at
Mountaineer, Upshur Property, Inc. (an affiliate of Anker Energy Corporation) is
the operator. Both operating contracts compensate the operator with a prescribed
fee plus reimbursement of costs.
Supply of Raw Materials
The synthetic fuel manufacturing facilities use coal fines as the primary
feedstock to produce synthetic fuel. Accordingly, a supply of coal fines is
essential to the feasibility of a synthetic fuel manufacturing facility.
Historically, lower quality coal and mining refuse and small pieces of coal
were discarded into refuse piles or impoundments. Today, coal preparation and
material handling technologies have reduced the amount of coal that is
discarded, but coal fines generated by coal mining and preparation are still
problematic in the industry. With some variation, most consumers of coal only
purchase coal with an ash content of 12% or less. Discarded coal fines are
typically too high in ash content to be used as-is in making marketable
synthetic fuel. To make use of fine coal refuse, owners of synthetic fuel plants
must either blend the refuse with "clean" coal in appropriate proportions to
yield an acceptable ash content, and/or clean the coal refuse itself. Clean coal
can be purchased from traditional coal marketers. Coal fines cleaning is a
distinct technology and to implement it successfully requires analysis of the
particular coal refuse to determine plant design and to determine whether
feedstock can be economically produced. Capital requirements for coal cleaning
or preparation plants adequate to supply a synthetic fuel plant can be in excess
of $4 million.
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<PAGE>
In facilities owned and operated by licensees, the licensee secures its own
supply of coal fines. Licensees that are also coal producers utilize their own
feedstock sources. Nonproducer licensees secure deposits of coal fines to supply
their facilities. The Company has arranged for the supply of coal fines for the
following facilities it owns or operates:
Utah Synfuel #1 and Carbon Synfuel. In February 1997, the Company entered
into a contractual arrangement with a non-affiliated party, Earthco, to acquire
the NEICO coal fines and to lease property to conduct fines recovery and
preparation activities at a location near Wellington, Utah (approximately six
miles from the Utah Plant site). The Company paid an initial amount to Earthco
upon execution of the lease agreement to acquire the fines and lease the
associated land and will continue to make quarterly payments through May 2002.
The Company constructed a preparation plant at the site which became operational
in May of 1998 and which produces feedstock from the acquired raw fines for the
Utah Synfuel #1 and Carbon Synfuel facilities. The estimated quantity of clean
coal fines at this site is 2 million tons. Additional fines will be required to
supply the longer term requirements of Utah Synfuel #1 and Carbon Synfuel.
Pocahontas Synfuel. In May 1997, the Company entered into a joint venture
with Black Diamond Enterprises, Inc. ("BDE") by which BDE has certain rights to
market the synthetic fuel produced at the facility and a percentage of the net
proceeds received by the Company from the project. In addition, BDE is to
provide coal fines to the Pocahontas Synfuel facility. BDE owns the land in
McDowell County, West Virginia upon which the facility is located and which land
includes a fines pond and other coal refuse containing an estimated 1.2 million
tons of recoverable clean fines. BDE and Covol plan to construct a preparation
plant to clean the raw BDE fines. To date, neither the Company nor BDE have
begun construction of a preparation plant. In addition to the fines at the
Pocahontas site, an affiliate of BDE operates a waste coal recovery operation
with an estimated 350,000 tons of recoverable clean fines. The Company has also
acquired waste coal on a site near the project with an estimated 500,000
recoverable clean tons. After cleaning, the coal fines from these reserves are
high in Btu, low in ash, and low in sulfur. Until a preparation plant can be
permitted, financed and constructed at Pocahontas, the Company is purchasing
coal fines from local sources for processing at the facility.
Commonwealth. The Commonwealth Synfuel facility is located on property
owned by River Hill Coal Company, Inc. ("River Hill"). River Hill has
approximately 6 million tons of leased and permitted coal reserves which it
actively mines. River Hill has agreed to provide up to 400,000 tons per year of
coal fines from its mining and preparation plant operations to the Commonwealth
facility.
Mountaineer. The Mountaineer Synfuel facility is located on property owned
by Upshur Property, Inc., an affiliate of Anker Energy Corporation ("Anker").
Anker has agreed to provide the feedstock requirements for the facility for a
period of ten years, up to 480,000 tons of feedstock per year. Anker will supply
the feedstock from various sources owned or controlled by Anker, including
preparation plant operations and fines ponds. The price for the feedstock varies
based upon the source of the coal fines and the costs of recovery. The site
contains a fines refuse pond which is serving as a partial source for feedstocks
and a preparation plant is planned to increase the quality and amount of
feedstock coming from the site refuse pond.
Supply of Binder. The Company purchases its patented and proprietary binder
from Dow Chemical Company ("Dow") under a ten year agreement under which the
Company pays a prescribed price per pound of binder. The Company arranges with
Dow the delivery of the binder from its manufacturing plants to each of the
synthetic fuel facilities owned, operated, or licensed by the Company.
Sale of Facilities.
The Company and its affiliates have developed and sold or have granted an
option to sell to buyers four synthetic fuel facilities. The following is a
summary of each option or sale:
Utah Synfuel #1. On March 10, 1997, Utah Synfuel #1 Ltd. ("US#1"), a
Delaware limited partnership in which the Company was at the time a 64% owner
and general partner, sold the Utah Synfuels #1 facility ("Utah Plant") for $3.5
million, in the form of a nonrecourse promissory note bearing interest at
9.6552% per annum and payable in 44 equal quarterly installments (the "Utah
Note"), all in accordance with
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<PAGE>
a Utah Project Purchase Agreement, dated as of March 7, 1997, between the
Company, US #1 and Coaltech No. 1 L.P. ("Coaltech") (the "Utah Purchase
Agreement"). The sale of the Utah Plant resulted in a loss of approximately
$581,000 to US#1. The Utah Note is secured by a security interest in the Utah
Plant, and in the event of a default under the Utah Note, the Company's and
US#1's sole right to recovery is limited to the Utah Plant without recourse
against Coaltech.
The Company granted Coaltech a put option to require the Company to
purchase from Coaltech the Utah Plant if (i) all of the Coaltech limited
partners are unable to utilize the federal income tax credits under Section 29
of the Code, (ii) the economic benefits accruing to or experienced by all of the
Coaltech limited partners differ significantly from what was initially
projected, or (iii) there is a permanent force majeure or material damage or
destruction of the Utah Plant. If the put option is exercised prior to the third
anniversary date of the grant, the option price will be equal to the fair market
value of the limited partnership interests of the optionees on a going concern
basis, but in no event will the option price exceed 50% of the capital
contributions made by the optionees to fund payments due under the Utah Note,
the Utah License Agreement and broker fees. If the put option is exercised on or
after the third anniversary date, the option price will be $10 and the optionees
will not be entitled to any other payments.
As part of the sale of the Utah Plant, the Company and US#1 entered into a
Supply and Purchase Agreement with Coaltech. Under the agreement, the Company
agreed to provide coal fines to the Utah Plant for processing into synthetic
fuel at an amount equal to the Company's per ton costs (including any wash
costs). Furthermore, US#1 agreed to purchase from Coaltech the synthetic fuel
produced at Coaltech's cost plus one dollar per ton. Coaltech has the right to
market its synthetic fuel to a third party, with US#1 having a right of first
refusal to purchase such synthetic fuel. The Company has incurred a loss each
quarter in connection with this agreement.
Carbon Synfuel. In connection with the Utah Purchase Agreement, the Company
on March 10, 1997 entered into an option agreement with Coaltech to sell a
second facility ("Carbon Synfuel") located at the Utah Plant. If Coaltech
exercises its option, the Company will sell the second line of synthetic fuel
manufacturing equipment including the building, binder plant, and other
equipment that were not part of the Utah Plant sale. The terms of the option
provide that Coaltech would purchase Carbon Synfuel on the same terms as
Coaltech's purchase of US#1.
Since the Utah Plant and Carbon Synfuel facility were first placed in
service they have experienced several problems, including inadequate clean coal
fines as a feedstock for operations, inadequate end product strength, and
inability to market to end-consumers the synthetic fuel product produced from
the feedstock.
The Utah Synfuel #1 and Carbon Synfuel facility are currently operating at
well below their rated capacity. The Company and its licensee have incurred a
loss on the production of synthetic fuel at the Utah Synfuel #1 and Carbon
Synfuel facilities.
In order to provide coal fines to the Utah Plant, the Company entered into
a purchase agreement with Earthco to acquire the NEICO coal fines. See "The
Company - Supply of Raw Materials -- Utah Synfuel #1 and Carbon Synfuel." The
estimated amount of clean coal fines equivalent at the NEICO site is 2 million
tons. The NEICO fines require washing. The Company constructed a wash plant at
the NEICO coal fines site which supplies coal fines to Utah Synfuel #1 and
Carbon Synfuel. The cost for the plant was approximately $8 million. The
financing for the construction of the wash plant was provided in part by AJG
Financial Services, Inc. ("AJG"), and is evidenced by a debenture of the Company
to AJG which is secured by the wash plant assets. The debenture bears interest
at 6% per annum with principal and interest being due and payable in two years.
As additional consideration to AJG for financing the wash plant, the Company, in
October 1997, agreed to grant AJG warrants to purchase approximately 430,000
shares of Company Common Stock, with fifty percent of the shares having a
purchase price of $10 per share and fifty percent of the shares having a
purchase price of $20 per share. The warrants expire two years from issuance.
Birmingham Syn Fuel. Alabama Synfuel #1 Ltd. ("AS#1"), a Delaware limited
partnership in which the Company was at the time a 74% owner and general
partner, sold the Birmingham Syn Fuel/Birmingport facility (the "Alabama Plant")
to Birmingham Syn Fuel, L.L.C. ("BSF") a wholly-owned subsidiary of PacifiCorp
19
<PAGE>
Financial Services, Inc. (together with any affiliates, "PacifiCorp"), on March
6, 1998. The purchase price for the Alabama Plant was $6,500,000 payable in the
form of a nonrecourse promissory note secured by certain portions of the Alabama
Plant.
Mountaineer Synfuel. On May 5, 1998 the Company entered into a purchase
agreement to sell the Mountaineer synthetic fuel facility to Mountaineer
Synfuel, L.L.C. ("Mountaineer"), a Delaware limited liability company. The
agreement is subject to numerous conditions, including but not limited to, the
obtaining of a PLR from the IRS, and the production of a product that meets
certain specifications. There is no assurance that Mountaineer will exercise its
option with respect to the purchase of this facility. At the time of the
purchase agreement, the Company entered into a financing agreement with
Mountaineer to finance up to $8.25 million for project construction and
operations working capital. The Company's obligation to repay the amounts
borrowed is secured by the assets of the project. Under a license agreement, the
Company will provide use of its technology and Mountaineer will pay a quarterly
license fee based upon the synthetic fuel product produced and sold during the
quarter. The Company will also supply binder material to the project on a cost
plus basis. Presently, Mountaineer and the Company are negotiating an extension
to the purchase option and new terms for the existing and additional financing
from Mountaineer.
In addition to the four facilities sold or under option to sell, the
Company owns and operates two synthetic fuel manufacturing facilities that the
Company has for sale. One facility is referred to as Commonwealth Synfuel,
located near Karthaus, Pennsylvania. The other Company-owned facility for sale
is referred to as Pocahontas Synfuel near North Fork, West Virginia. Several
entities have expressed interest in the purchase of the facilities, but the
Company cannot give assurance that it will successfully sell either or both
facilities.
Research and Development
The Company has devoted and continues to commit significant human and
capital resources to the development, refinement and commercialization of the
Company Technologies in the engineered fuel and engineered resource
applications. The Company is currently focusing its R&D efforts principally on
the synthetic fuel technology, including refinements to the process methodology,
enhancements to the base binder formulations to address product quality issues,
and continued testing and development of other binder materials for the
production of synthetic fuel. The Company is also currently conducting R&D
related to application of the Company Technologies to iron revert materials,
coke breeze, silicon carbide and other waste product or resource materials.
The Company's intellectual property base consists of seven U.S. and four
international patents relating to the Company Technologies as applied to coal,
reverts, coke and other carbonaceous materials. The Company's R&D efforts will
be directed toward perfecting and expanding these technologies and the filing
for patents for proprietary intangible property developed. See "The Company -
Proprietary Protection."
Proprietary Protection
The Company has the following tradenames and patents covering certain
aspects of the Company's technology:
Tradenames:
Covol Technologies, Inc.; Alabama Synfuel #1, Ltd.; Utah Synfuel #1 Ltd.;
wholly-owned subsidiaries -- Flat Ridge Corporation and Engineered Fuel
Technologies, Inc.
Trademarks and Service Marks:
United States Trademark Registration No. 2,038,742 for licensing services
identified by "Covol", "Recycling Yesterday's Waste Into Tomorrow's
Resources."
United States Patents:
20
<PAGE>
United States Patent No. 5,453,103, which issued 26 September 1995.
United States Patent No. 5,487,764, which issued 30 January 1996.
United States Patent No. 5,589,118, which issued 31 December 1996.
United States Patent No. 5,599,316, which issued 4 February 1997.
United States Patent No. 5,738,694, which issued 14 April 1998.
United States Patent No. 5,752,993, which issued 19 May 1998.
United States Patent No. 5,807,420, which issued 15 September 1998.
Foreign Patents:
European Patent Office # 96905442.8-2307 filed May 1, 1998.
Australian #686624 filed on January 21, 1994; filed with U.S. Patent Office
as No. 184099 on May 28, 1998.
New Zealand #266060 filed on April 7, 1994; filed with U.S. Patent Office
on February 20, 1998.
Republic of Trinidad and Tobago #970147 filed under PCT/US96/01798 on
February 8, 1996.
Other United States, Patent Cooperative Treaty, and Foreign Patent Applications
are pending.
Government Regulation
The Company's and its licensees' present and proposed synthetic fuel
operations are subject to federal, state and local environmental regulations
that impose limitations on the discharge of pollutants into the air and water
and establish standards for the treatment, storage and disposal of waste
products. In order to establish and operate the synthetic fuel plants, the
Company and its licensees obtained various state and local permits. The Company
has obtained all permits required to date, believes that it will be able to
obtain future permits without inordinate difficulty or expense and that it is in
substantial compliance with all material laws and regulations governing the
synthetic fuel operations. The Company believes that environmental compliance
for new synthetic fuel plants will not entail significant costs. However, the
Company's synthetic fuel operations may entail risk of environmental damage and
the Company may incur liabilities in the future arising from the discharge of
pollutants into the environment or from its waste disposal practices.
The Company's and its licensees' present and proposed synthetic fuel
operations are also subject to federal and state safety and health standards.
Compliance to applicable safety and health standards is verified through
periodic inspections by regulatory agencies. Failure to comply with safety and
health standards could have a material adverse affect on the Company, e.g., a
regulatory inspector could close the operation until compliance levels are
achieved.
The Company is committed to providing effective management of worker safety
and health protection. The Company periodically contracts with independent
safety and industrial hygiene inspectors in order to measure a facility's
regulatory compliance. In addition, the Company has developed a safety policy
designed to raise and maintain a high level of safety awareness by both
management and employees.
Failure to obtain necessary permits to construct and operate synthetic fuel
plants could have a material adverse effect on the Company. Other developments,
such as the enactment of more stringent environmental laws and regulations,
could require the Company to incur significant capital expenditures. If the
Company does not have the financial resources or is otherwise unable to comply
with such laws and regulations, such failure could also have a material adverse
effect on the Company.
21
<PAGE>
Competition
The Company may experience competition from other alternative fuel
technology companies and their licensees, particularly those companies with
technologies to produce coal based solid synthetic fuels. Competition may come
in the form of the licensing of the competing technologies or in the marketing
of end products qualifying as synthetic fuel. Competition includes, but is not
limited to, Carbontec, Krystal Bond, KFx Inc. and Startec Inc. The Company will
also experience competition from traditional coal and fuel suppliers and natural
resource producers in addition to those companies that specialize in the
disposal and recycling of waste products generated by coal, coke, steel and
other resource production. Many of these companies have greater financial,
management and other resources than the Company. The Company anticipates that it
will be able to compete effectively although there can be no assurance that it
will do so successfully.
Employees
The Company currently employs approximately 96 persons full-time.
Approximately 31 of such persons are in corporate administration including
research, development and marketing, and 65 are in synthetic fuel and coal
washing operations. None of these employees are covered by a collective
bargaining agreement.
Disputes and Legal Proceedings
Asbestos Investigation. In January 1996, a manager of the Company entered
property owned by Nevada Electric Investment Company ("NEICO"), a subsidiary of
Nevada Power Corporation, in connection with an offer by the Company to purchase
the property, and with certain other employees of the Company, removed some
asbestos over a two-day period. In May of 1996 the Company received a notice of
violation and order for compliance from the State of Utah, Division of Air
Quality alleging that asbestos was improperly handled, removed, and disposed of.
The Company complied with the order and in September of 1996 entered into a
settlement agreement with the State of Utah and paid a fine in the amount of
$11,000. In late 1997 the U.S. Environmental Protection Agency began its own
investigation, referring the matter to the U.S. Attorney's office which
proceeded with a grand jury inquiry. The Company does not know of the results of
the grand jury inquiry or whether the inquiry is completed. The Company is
defending the matter, but there is no assurance that it will not adversely
affect the Company.
Indemnification to Centerline. In December 1996, the Company entered into
six indemnification agreements with Centerline whereby the Company agreed to
indemnify Centerline should it be required to pay liquidated damages to
PacifiCorp under various design and construction agreements for six coal
agglomeration facilities. Under the original terms of the various design and
construction agreements, if the facilities were not completed by June 1, 1998
then $750,000 in liquidated damages for each facility would be due and payable
by Centerline. The indemnification agreement only applied if PacifiCorp actually
decided to build the facilities with Centerline as the design/builder.
PacifiCorp elected to not build three of the projects, and therefore the
indemnity agreement with respect to those facilities no longer applies.
Accordingly, the maximum amount of contingent liability to the Company under the
indemnification agreements is $2,250,000 ($750,000 per design and construction
agreement).
Counsel for Centerline has notified the Company that a dispute exists
between Centerline and PacifiCorp which may require indemnification by the
Company. The Company has been advised that the dispute is proceeding to
arbitration.
Pace Loan. In December of 1996 the Company entered into license agreements
with affiliates of Pace Carbon Fuels, L.L.C. (collectively "Pace") for the use
of the Company's technology at four synthetic fuel manufacturing facilities
owned by Pace. In 1998 Pace requested a reduction in the license fees payable to
the Company under the license agreements. Upon condition of immediate payment by
Pace of advance license fees, the Company agreed to a reduction in future
license fees. This reduction was accomplished by a ten year loan agreement
whereby the Company would loan to Pace up to $750,000 each quarter beginning in
November 1998. The Company's loan to Pace will be repaid at the end of the ten
years only if the Pace projects have accumulated sufficient prescribed earnings.
Pace has requested a loan of $750,000 for the
22
<PAGE>
November 1998 quarter. The Company believes that its current loan obligation to
Pace is limited to the earned license fees payable to by the Company for the
quarter ended September 30, 1998, which is believed to be approximately
$300,000.
MATERIAL CHANGES
The Company has experienced the following material events since the date of
filing of its last Annual Report on Form 10-K, which have not previously been
the subject of subsequent Quarterly Reports on Form 10-Q or Current Reports on
Form 8-K:
1. Partnership Conversions
In 1996, the Company formed two limited partnerships, Alabama Synfuel #1
Ltd. ("AS#1") and Utah Synfuel #1 Ltd. ("US#1"), to assist with the financing of
construction at two synthetic fuel manufacturing facilities. These two
facilities have been sold and are now owned by Birmingham Syn Fuel, L.L.C. and
Coaltech No. 1 L.P. On September 9, 1998 the Company offered the limited
partners in US#1 and AS#1 an exchange of the Company's Common Stock for their
limited partnership interests. The exchange ratio was based in part on an
independent valuation of the limited partnership's assets and other factors
including but not limited to current and future expected cash flow of the
partnerships and current market values of the Company's Common Stock as quoted
on NASDAQ. The exchange ratio for US#1 was 112.828 shares of Common Stock per
each limited partnership unit and 125.97 shares for each AS#1 limited
partnership unit. The limited partnership's units originally sold for $1,000 per
unit.
As of November 10, 1998, all of the limited partners had elected to
exchange their limited partnership interests for shares of the Company's Common
Stock and accordingly these partnerships are now wholly-owned subsidiaries of
the Company.
2. Financings
During September 1998 the Company completed a financing of $1,500,000 that
consisted of the sale of 55,555 units at $27.00 per unit. A unit consisted of
three shares of restricted common stock of the Company plus one warrant to
purchase one share of restricted common stock at a price of $12.00. The warrants
expire September 16, 2000 if not exercised.
During November 1998, the Company completed a financing transaction that
consisted of $400,000 of debt and approximately $3,500,000 of equity. The debt
had a term of twelve months, bears interest at 15% per annum, with an interest
only payment due in six months and with the balance of interest and principal
due at maturity. The debt is collateralized by certain assets of the Company and
is due prior to maturity upon the placement of long-term financing by the
Company. The equity transaction consisted of the sale of at unit as a price of
$5.00. A unit consisted of one share of restricted common stock of the Company
plus a warrant to purchase one additional share of restricted common stock at an
exercise price of $7.50. The warrants expire in twelve months if not exercised.
The restricted stock and shares issuable pursuant to the related warrants have
been provided piggyback registration rights.
USE OF PROCEEDS
The net proceeds from the sale of the Shares will be received by the
Selling Stockholders. The Company will not receive any of the proceeds from any
sale of the Shares by the Selling Stockholders.
Some Selling Stockholders will acquire Shares upon exercise of Warrants.
The exercise price of most Warrants exceeds the market price of the Common Stock
on the date of this Prospectus.
SELLING STOCKHOLDERS
The table below sets forth information as of November 16, 1998 with respect
to the Selling Stockholders, including names, holdings of shares of Common Stock
prior to the offering of the Shares, and the number of Shares being offered for
each account. The amounts in the table assume full conversion of
23
<PAGE>
Series A and B Preferred Stock held by a Selling Stockholder and exercise of all
warrants held by a Selling Stockholder. The Registration Statement of which this
Prospectus is a part was filed by the Company pursuant in part to registration
rights granted to the Selling Stockholders and does not necessarily indicate a
present intent to sell Common Stock by the Selling Stockholders.
<TABLE>
<CAPTION>
Number of Shares Shares Beneficially
Beneficially Shares to be Owned After the
Name and Address of Owned Prior to Sold in the Offering(1)(3)
Beneficial Owner the Offering(1) Offering(2) Number Percent
---------------- --------------- ----------- ------ -------
<S> <C> <C> <C> <C>
AJG Financial Services, Inc. 140,642
w432,544
Alder, Susan 5,400
w1,667
Allen, George & Roy 1,000
Allen, George 5,000
ALPCO 1,500
American Port Consultants 15,000
Anderson, Bennett 20,000
Anderson, Bennett & Rochelle 4,000
Angel, Robert S. 5,000
Apollo Salzburg Bank, Austria 10,000
Asia Orient Enterprises Ltd. 52,800
w70,800
Baildon Holdings Pty Limited 12,650
w12,650
Banyan Investment 18,000
w88,095
Benson, Kirk 466,665
w355,555
Black, Geoffrey 4,400
w4,400
Bours Family 160
Bradshaw, Brett 1,200
Brannon, Ana 2,500
Busch, Lawrence 9,000
Cartwright Holdings w35,000
Cecala, Enrico 24,000
Chase, Michael H. 25,000
w42,142
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Shares Beneficially
Beneficially Shares to be Owned After the
Name and Address of Owned Prior to Sold in the Offering(1)(3)
Beneficial Owner the Offering(1) Offering(2) Number Percent
---------------- --------------- ----------- ------ -------
<S> <C> <C> <C> <C>
Citano Pty Limited ATF G.N. Willis 9,900
Family Trust w9,900
Connors, Tom 5,000
w5,000
Coralco Pty Limited 11,000
w17,000
Criddle, Mark & Jolynn 600
Criddle, Mark 3,000
D'Ambrosio, Sue 6,000
D'Ambrosio, Kara J. 6,000
D'Ambrosio, Christianne 1,200
D'Ambrosio, Louis 24,000
Danks, Terri 15,000
Danks, Donald w78,583
Davey, Miranda 14,850
w14,850
Dean, Gordon 21,435
Dekramer, Karen 2,400
Diamond Jay Ltd. Co. w85,713
AP460,571
Dickinson, Douglas w10,000
Elinora Investments w40,000
Emery, Robert 200
Forrester Family 6,000
Forrester, Michael G. 30,000
Foster, Craig 24,200
w24,200
Fraser, C. w4,000
Freadhoff, Kieth 15,000
Fun Enterprises Pty Limited 2,500
w104,738
Gonolek w16,000
Gronning, Eugene 2,000
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Shares Beneficially
Beneficially Shares to be Owned After the
Name and Address of Owned Prior to Sold in the Offering(1)(3)
Beneficial Owner the Offering(1) Offering(2) Number Percent
---------------- --------------- ----------- ------ -------
<S> <C> <C> <C> <C>
G T Investments 5,500
w5,500
Hannan, David w5,000
Hannes, Damien 16,500
w31,500
Hardcastle, Lloyd 11,000
Hardcastle, Larry 400
Harper, Prudence 11,000
w28,750
Hartman, Doug 18,000
Haus & Company 50,000
Jensen, W. Reed, 8,000
Johnson, Joe w552,000
Kamdar, Kiran 1,800
Kaufmann, Marvin TTEE 18 400
Kelley, Steven 9,000
KGB Family Ltd. 400
Khaled, Michael 45,000
Krueger, Siegfried 1,500
Lakeshore Securities 8,400
Lanier, Judson 9,000
Leech, Gary w5,000
Love, Michael w3,000
Lowe, Raymond 18,000
Lundgren, Ken 4,000
Merinda Controls Pty Limited 22,000
w22,000
McOmber, Roger 14,285
w14,285
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Shares Beneficially
Beneficially Shares to be Owned After the
Name and Address of Owned Prior to Sold in the Offering(1)(3)
Beneficial Owner the Offering(1) Offering(2) Number Percent
---------------- --------------- ----------- ------ -------
<S> <C> <C> <C> <C>
Michelsen, Fredrick Lynn 5,500
w5,500
Mills, Diana 2,500
w19,950
BP13,887
Montesi, Diane w8,332
Montesi, Joe Jr. w33,332
Montesi, Joe Sr. w8,332
Moubray Corporation 41,250
w76,338
4,000
Mower, Clark w12,000
Muhlestien, Tim 81
Mygunyah Pty Ltd. w3,000
Pacific Asset Investment Limited 2,200
w2,200
Olafson, Gregory 19,500
Perwick Holdings 36,000
Peterson, Mark 28,000
w20,000
Peterson, Nancy 3,000
w20,000
Pillsbury, Taylor & Jill 100
Pillsbury, Taylor 500
Pooley, John w3,000
Purmort, Andrew 7,500
Reflex Nominees Limited 4,400
w7,400
Roberts, John 17,600
w24,600
Ropner, Paul 15,000
Ropner, Paul BP 3,000
Shelley, David w9,000
Smith, Edwin 4,000
w4,000
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Shares Beneficially
Beneficially Shares to be Owned After the
Name and Address of Owned Prior to Sold in the Offering(1)(3)
Beneficial Owner the Offering(1) Offering(2) Number Percent
---------------- --------------- ----------- ------ -------
<S> <C> <C> <C> <C>
Smith, Robert 26,000
w33,000
Southwest Securities, FBO Keith 13,000
Wisbaum
Sowby, James & Teri 3,600
Stamford Holdings 11,358
w46,569
Stanley, Geoff w5,000
Stapleton, James P. 6,000
Steel Number 4 Investments Limited 20,900
w20,900
S&N Partnership 9,000
Thomas, William 18,000
Turnbow, Lynn 10,000
Vanderhoof, Mike 30,000
w78,583
Whisper Investment 8,400
w7,334
White, Dennis 12,000
Wilson, Douglas 5,000
Wolt, Eddie 2,500
Wolt, Linda 4,000
Wolt, Scott 10,000
Wright, Nicholas H. 20,000
w50,000
328,425
Wright, Stephen 4,000
w4,000
Yang, Paul, JC, & Dorothy Jones 5,000
York Investment w25,000
To Be Designated 515,353
w4,286
- - ---------------------------------------
</TABLE>
(1) Includes Common Stock issuable to the Selling Stockholder on exercise
of warrants or conversion of Series A and Series B Preferred Stock.
28
<PAGE>
(2) This column indicates shares of Common Stock; shares issuable on
exercise of Warrants by the letter "w"; shares issuable upon the
conversion of Series A Preferred Stock by the letters "AP;" and shares
issuable upon conversion of Series B Preferred Stock by the letters
"BP."
(3) Assumes that the Selling Stockholder sells all Common Stock being
offered.
PLAN OF DISTRIBUTION
This Prospectus relates to the offer and sale by the Selling Stockholders
of Common Stock of the Company. Selling Stockholders offering up to 2,586,154
Shares currently own such Shares. Selling Stockholders offering up to 2,641,808
Shares have the right to acquire such Shares on exercise of warrants previously
issued by the Company. The remaining Shares may be received by the Selling
Stockholders on conversion of Series A Preferred Stock or Series B Preferred
Stock which they owned as of the date of this Prospectus.
The Series A Preferred Stock is convertible from time to time by the
holders thereof based upon the original purchase price of $1,000 per preferred
share, plus accrued dividends thereon, divided by $7.00 per share of Common
Stock. Dividends on any Series A Preferred Stock accrue at 6% per annum. There
are 3,224 shares of Series A Preferred Stock outstanding.
The Series B Preferred Stock is convertible from time to time by the
holders thereof based upon the original purchase price of $7.00 per preferred
share, plus accrued dividends thereon, divided by $7.00 per share of Common
Stock. Dividends on any Series B Preferred Stock accrued at 7.29% per annum
which dividend rate was adjusted on March 18, 1998 to the two year Treasury Bond
rate plus 1 1/2% per annum. There are 12,858 shares of Series B Preferred Stock
outstanding. Approximately 90% of the Series B Preferred Stock was converted
into 308,425 shares of Common Stock during October 1998.
If the remaining Series A Preferred Stock and Series B Preferred Stock
converted into Common Stock, the total number of Shares of Common Stock issued
on conversion would be approximately 474,458 shares. The actual number of Shares
being offered by the Selling Stockholders who hold Preferred Stock may be more
or less than this amount depending upon the amount of dividends which accrue on
the Preferred Stock prior to conversion into Common Stock. The conversion price
for each class of Preferred Stock is subject to antidilution adjustment.
Any distribution of the Shares by the Selling Stockholders, or by their
pledgees, donees, transferees or other successors in interest, may be effected
from time to time in one or more of the following transactions: (a) to
underwriters who will acquire the Shares for their own account and resell them
in one or more transactions, including negotiated transactions, at a fixed
public offering price or at varying prices determined at the time of sale (any
public offering price and any discount or concessions allowed or reallowed or
paid to dealers may be changed from time to time); (b) through brokers, acting
as principal or agent, in transactions (which may involve block transactions) on
the Nasdaq Stock Market or on one or more exchanges on which the Shares are then
listed, in special offerings, exchange distributions pursuant to the rules of
the applicable exchanges or in the over-the-counter market, or otherwise, at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices, at negotiated prices or at fixed prices; (c) directly
or through brokers or agents in private sales at negotiated prices; or (d) by
any other legally available means.
The Selling Stockholders and such underwriters, brokers, dealers or agents,
upon effecting a sale of the Shares, may be considered "underwriters" as that
term is defined by the Securities Act.
Underwriters participating in any offering made pursuant to this Prospectus
(as amended or supplemented from time to time) may receive underwriting
discounts and commissions, discounts or
29
<PAGE>
concessions may be allowed or re-allowed or paid to dealers, and brokers or
agents participating in such transaction may receive brokerage or agent's
commissions or fees.
In order to comply with the securities laws of certain states, if
applicable, the Shares will be sold in such jurisdictions, if required, only
through registered or licensed brokers or dealers. In addition, in certain
states the Shares may not be sold unless the Shares have been registered or
qualified for sale in such state or an exemption from registration or
qualification is available and complied with.
The Company has agreed to indemnify certain of the Selling Stockholders
against certain liabilities, including liabilities under the Securities Act, or
to contribute to payments the Selling Stockholders may be required to make in
respect thereof.
LEGAL MATTERS
The validity of the Shares offered hereby are being passed upon
for the Company by Callister Nebeker & McCullough, Salt Lake City, Utah.
EXPERTS
The consolidated financial statements of the Company and its
subsidiaries, included in the report on Form 10-K of the Company for the fiscal
year ended September 30, 1997 referred to above have been audited by
PricewaterhouseCoopers LLP, independent accountants, as set forth in their
report dated December 31, 1997, accompanying such financial statements, and are
incorporated herein by reference in reliance upon the report of such firm, which
report is given upon their authority as experts in accounting and auditing.
Any financial statements and schedules hereafter incorporated by
reference in the registration statement of which this prospectus is a part that
have been audited and are the subject of a report by independent accountants
will be so incorporated by reference in reliance upon such reports and upon the
authority of such firm as experts in accounting and auditing to the extent
covered by consents filed with the Commission.
30
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following is a list of the estimated expenses to be incurred
by the Registrant in connection with the issuance and distribution of the Shares
being registered hereby.
SEC Registration Fee...................................... $8,992.64
Accountants' Fees and Expenses............................ 5,000.00
Legal Fees and Expenses................................... 120,000.00
Miscellaneous............................................. 10,000.00
---------
TOTAL................................................$143,992.64
- - --------------------
* Estimated, subject to change.
Item 15. Indemnification of Directors and Officers.
Section 145 of the General Corporation Law of the State of
Delaware provides that a corporation may indemnify its officers, directors,
employees and agents (or persons who have served, at the corporation's request,
as officers, directors, employees or agents of another corporation) against the
expenses, including attorneys' fees, actually and reasonably incurred by them in
connection with the defense of any action by reason of being or having been
directors, officers, employees or agents, if such person shall have acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and with respect to any criminal action or
proceedings, had no reason to believe his conduct was unlawful, except that if
such action shall be in the right of the corporation, no such indemnification
shall be provided as to any claim, issue or matter as to which such person shall
have been adjudged to have been liable to the corporation unless and only to the
extent that the Court of Chancery of the State of Delaware, or any other court
in which the suit was brought, shall determine upon application that, in view of
all the circumstances of the case, such person is fairly and reasonably entitled
to indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
The Registrant's Certificate of Incorporation, as amended, has the
following indemnification provisions:
This Corporation shall indemnify and shall advance expenses on
behalf of its officers and directors to the fullest extent not
prohibited by law in existence either now or hereafter.
The Registrant's By-laws similarly provide that the Registrant shall
indemnify its officers and directors to the fullest extent permitted by the
Delaware Law.
31
<PAGE>
Item 16. Exhibits.
Exhibit
Number Description Location
2.1 Agreement and Plan of Reorganization, dated July 1, 1993 (1)
between the Registrant and the Stockholders of R1001
2.2 Agreement and Plan of Merger dated August 14, 1995 between (1)
the Registrant and Covol Technologies, Inc., a Delaware
corporation
2.3 Stock Purchase Agreement, dated July 1, 1993, among the (1)
Registrant, Lloyd C. McEwan, Michael McEwan, Dale F. Minnig
and Ted C. Strong regarding the purchase of Industrial
Management & Engineering, Inc. and Central Industrial
Construction, Inc.
2.4 Stock Sale Transaction Documentation, effective as of September (1)
30, 1994, between the Registrant and Farrell F. Larson regarding
Larson Limestone Company, Inc.
2.5 Stock Purchase Agreement dated February 1, 1996 by and among (1)
the Registrant, Michael McEwan and Gerald Larson regarding the
sale of State, Inc., Industrial Engineering & Management, Inc.,
Central Industrial Construction, Inc., and Larson Limestone
Company, Inc.
2.5.1 Amendment to Share Purchase Agreement regarding the sale of (1)
the Construction Companies
2.5.2 Amendment No. 2 to Share Purchase Agreement regarding the (2)
sale of the Construction Companies
3.1 Certificate of Incorporation of the Registrant (1)
3.1.1 Certificate of Amendment of the Certificate of Incorporation of (1)
the Registrant dated January 22, 1996
3.1.2 Certificate of Amendment of the Certificate of Incorporation (3)
dated June 25, 1997
3.1.3 Certificate of Designation, Number, Voting Powers, Preferences (4)
and Rights of the Registrant's Series A 6% Convertible Preferred
Stock (Originally designated as Exhibit No. 3.1.2)
3.1.4 Certificate of Designation, Number, Voting Powers, Preferences (5)
and Rights of the Registrant's Series B Convertible Preferred
Stock (Originally designated as Exhibit No. 3.1.3)
3.2 By-Laws of the Registrant (1)
32
<PAGE>
2.1 Agreement and Plan of Reorganization, dated July 1, 1993 (1)
between the Registrant and the Stockholders of R1001
between the Registrant and the Stockholders of R1001
3.2.1 Certificate of Amendment to Bylaws of the Registrant dated (1)
January 31, 1996
3.2.2 Certificate of Amendment to the Bylaws dated May 20, 1997 (3)
(Originally designated as Exhibit No. 3.2.1)
3.2.3 Certificate of Amendment to the Bylaws dated June 25, 1997 (3)
(Originally designated as Exhibit No. 3.2.2)
5.1 Opinion of Callister Nebeker & McCullough regarding legality of **
shares
23.1 Consent of PricewaterhouseCoopers LLP
*
24.1 Power of Attorney (included in Part II of this Registration
Statement)
- - -----------------
* Attached hereto.
** To be filed by Amendment.
Unless another exhibit number is indicated as the exhibit number for the exhibit
as "originally filed," the exhibit number in the filing in which any exhibit was
originally filed and to which reference is made hereby is the same as the
exhibit number assigned herein to the exhibit.
(1) Incorporated by reference to the indicated exhibit filed with the
Registrant's Registration Statement on Form 10, filed February 26,
1996.
(2) Incorporated herein by reference to the indicated exhibit filed with
the Registrant's Registration Statement on Form 10/A, Amendment No. 2,
dated April 24, 1996.
(3) Incorporated by reference to the indicated exhibit filed with the
Registrant's Quarterly Report on Form 10-Q, for the quarterly period
ended June 30, 1997.
(4) Incorporated by reference to the indicated exhibit filed with the
Registrant's Current Report on Form 8-K, dated August 19, 1997.
(5) Incorporated by reference to the indicated exhibit filed with the
Registrant's Current Report on Form 8-K, for event dated September 18,
1997, filed October 28, 1997.
- - ------------------------
Item 17. Undertakings.
A. The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933, as amended (the "Act");
33
<PAGE>
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the Registration Statement (or the
most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with
respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information in
the Registration Statement;
provided, however, that paragraphs (A)(1)(i) and (A)(1)(ii) do
not apply if the Registration Statement is on Form S-3, Form S-8 or Form F-3,
and the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed with or furnished to the
Securities and Exchange Commission (the "Commission") by the Registrant pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), that are incorporated by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under
the Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
B. The undersigned Registrant hereby undertakes that for purposes of
determining any liability under the Act, each filing of the Registrant's annual
report pursuant to Section 13(a) or Section 15(d) of the Exchange Act (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference
in the Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
C. Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
D. The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and
34
<PAGE>
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
[INTENTIONALLY LEFT BLANK]
35
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Salt Lake City, State of Utah on November 16,
1998.
COVOL TECHNOLOGIES, INC.
By: Brent M. Cook
---------------------------------
Chief Executive Officer, Chairman
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below in so signing also makes, constitutes and appoints
Harlan M. Hatfield and Stanley M. Kimball and each of them, as true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution
for him and in his name, place and stead, in any and all capacities to execute
and cause to be filed with the Securities and Exchange Commission any and all
amendments (including pre-effective and post-effective amendments) to this
Registration Statement, with exhibits thereto and other documents in connection
therewith, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully as to all intents and purposes as
he might or could do in person, and hereby ratifies and confirms all that said
attorneys-in-fact and agents or their or his substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
Signature Title Date
Stanley M. Kimball President and Director November 16, 1998
- - --------------------
Name
Steven G. Stewart Chief Financial Officer November 16, 1998
- - --------------------
Name
DeLance W. Squire Director November 16, 1998
- - --------------------
Name
James A. Herickhoff Director November 16, 1998
- - --------------------
Name
Raymond J. Weller Director November 16, 1998
- - --------------------
Name
John P. Hill, Jr. Director November 16, 1998
- - --------------------
Name
36
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement on
Form S-3 of our report dated December 31, 1997, on our audits of the
consolidated financial statements of Covol Technologies, Inc. and Subsidiaries
as of September 30, 1997 and 1996, and for each of the three years in the period
ended September 30, 1997, appearing in the annual report on Form 10-K of Covol
Technologies, Inc. filed with the Securities and Exchange Commission pursuant to
the Securities Act of 1934. We also consent to the reference to our firm under
the caption "EXPERTS."
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Salt Lake City, Utah
November 16, 1998
