UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______ to ______
Commission file number 0-27808
COVOL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0547337
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3280 North Frontage Road
Lehi, Utah 84043
(Address of principal executive offices) (Zip Code)
(801) 768-4481
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
The number of shares outstanding of the Registrant's common stock as of August
9, 1999 was 12,722,492.
<PAGE>
COVOL TECHNOLOGIES, INC.
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL INFORMATION (Unaudited)
Consolidated Balance Sheets - As of September 30, 1998
and June 30, 1999.............................................. 3
Consolidated Statements of Operations - For the three
months ended June 30, 1998 and 1999 and the nine months
ended June 30, 1998 and 1999................................... 5
Consolidated Statement of Changes in Stockholders' Equity -
For the nine months ended June 30, 1999........................ 6
Consolidated Statements of Cash Flows - For the nine months
ended June 30, 1998 and 1999................................... 7
Notes to Consolidated Financial Statements....................... 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................ 17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................ 25
ITEM 2. CHANGES IN SECURITIES............................................ 26
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................. 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 26
ITEM 5. OTHER INFORMATION................................................ 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................. 26
SIGNATURES.................................................................. 27
Certain statements in this Report constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. As such,
actual results may vary materially from current expectations. For a discussion
of certain of the factors that could cause actual results to differ from
expectations, please see the information set forth under the caption entitled
"Forward Looking Statements" in PART I, ITEM 2 hereof. There can be no assurance
that Covol's results of operations will not be adversely affected by such
factors. Covol undertakes no obligation to revise or publicly release the
results of any revision to these forward-looking statements. Readers are
cautioned not to place undue reliance on these forward looking statements, which
reflect management's opinion only as of the date hereof.
2
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL INFORMATION (Unaudited)
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, June 30,
(thousands of dollars) 1998 1999
- ------------------------------------------------------------------------------------------- ---------------- -----------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 727 $ 1,932
Receivables 2,879 2,200
Due from related party 1,012 2,271
Inventories 1,645 1,683
Advances on inventories, current 2,522 935
Facilities held for sale 28,405 28,542
Prepaid expenses and other current assets 682 439
--------------- ----------------
Total current assets 37,872 38,002
--------------- ----------------
Property, plant and equipment, net of accumulated depreciation 14,986 14,402
--------------- ----------------
Other assets:
Restricted investments 748 717
Advances on inventories, non-current -- 2,742
Facility-dependent notes and accrued interest receivable 7,646 8,054
Facility transferred under note receivable arrangement 3,166 2,774
Intangible assets, net of accumulated amortization 3,118 3,875
Deposits and other assets 525 1,809
--------------- ----------------
Total other assets 15,203 19,971
--------------- ----------------
Total assets $68,061 $72,375
=============== ================
</TABLE>
(continued)
The accompanying notes are an integral
part of the consolidated financial statements
3
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, continued
(Unaudited)
September 30, June 30,
(thousands of dollars and shares) 1998 1999
- -------------------------------------------------------------------------------------------- --------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
<S> <C> <C>
Accounts payable $ 3,036 $ 1,265
Due to related party 1,609 2,377
Accrued liabilities 2,858 3,023
Notes payable, current 22,049 20,359
--------------- ----------------
Total current liabilities 29,552 27,024
--------------- ----------------
Long-term liabilities:
Notes payable, non-current 13,930 22,695
Accrued interest payable, non-current 566 255
Notes and accrued interest payable - related parties, non-current 147 --
Deferred revenues from advance license fees 8,377 7,697
Deferred compensation 236 205
--------------- ----------------
Total long-term liabilities 23,256 30,852
--------------- ----------------
Total liabilities 52,808 57,876
--------------- ----------------
Minority interest in consolidated subsidiaries 507 109
--------------- ----------------
Commitments and contingencies (Note 6)
Redeemable convertible preferred stock, $.001 par value, issued and outstanding
0 shares at September 30, 1998 and 60 shares at June 30, 1999 (aggregate
liquidation preference of $7,623 at June 30, 1999) -- 4,332
--------------- ----------------
Stockholders' equity:
Convertible preferred stock, $0.001 par value; authorized 10,000 shares,
issued and outstanding 316 shares at September 30, 1998 and 18 shares at
June 30, 1999 (aggregate liquidation preference of $4,170 at June 30, 1999) 1 1
Common stock, $0.001 par value; authorized 25,000 shares, issued and outstanding
11,272 shares at September 30, 1998 and 12,586 shares at June 30, 1999 11 12
Capital in excess of par value 69,284 78,091
Accumulated deficit (43,002) (58,321)
Notes and interest receivable - related parties, from issuance of, or
collateralized by, common stock, net of allowance (7,773) (7,024)
Deferred compensation from stock options (3,775) (2,701)
--------------- ----------------
Total stockholders' equity 14,746 10,058
--------------- ----------------
Total liabilities and stockholders' equity $68,061 $72,375
=============== ================
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
4
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Note 1)
(Unaudited)
Three Months Ended June 30, Nine Months Ended June 30,
(thousands of dollars, except per-share amounts) 1998 1999 1998 1999
- -------------------------------------------------------------- ---------------- ---------------- ---------------- ---------------
Revenues:
<S> <C> <C> <C> <C>
License fees $226 $ 853 $428 $2,140
Synthetic fuel sales -- 242 5 242
Binder sales -- 409 -- 1,365
Binder and coal fine sales - related party 1,248 50 3,243 233
Binder plant sales 1,298 -- 1,298 --
Other 4 23 70 122
---------------- ---------------- ---------------- ---------------
Total revenues 2,776 1,577 5,044 4,102
---------------- ---------------- ---------------- ---------------
Operating costs and expenses:
Cost of coal briquetting operations 1,409 2,866 2,457 8,687
Cost of binder -- 291 -- 941
Cost of binder and coal fines - related party 1,056 7 3,073 42
Cost of binder plants 1,095 -- 1,095 --
Asset impairment charge -- -- -- 556
Selling, general and administrative 1,111 1,338 3,003 3,500
Research and development 81 154 309 497
Compensation expense from stock options, stock
warrants and issuance of common stock 286 749 732 1,074
---------------- ---------------- ---------------- ---------------
Total operating costs and expenses 5,038 5,405 10,669 15,297
---------------- ---------------- ---------------- ---------------
Operating loss (2,262) (3,828) (5,625) (11,195)
---------------- ---------------- ---------------- ---------------
Other income (expense):
Interest income 224 308 363 1,298
Interest expense -- (1,981) (2,292) (4,394)
Minority interest in net losses of consolidated
subsidiaries 183 -- 321 --
Write-up (write-down) of notes receivable - related
parties, collateralized by common stock 532 -- 1,095 (749)
Other (38) (26) 71 (102)
---------------- ---------------- ---------------- ---------------
Total other income (expense) 901 (1,699) (442) (3,947)
---------------- ---------------- ---------------- ---------------
Net loss $(1,361) $(5,527) $(6,067) $(15,142)
================ ================ ================ ===============
Basic and diluted loss per common share $(.14) $(.48) $(.65) $(1.28)
================ ================ ================ ===============
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
5
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Nine Months Ended June 30, 1999
(Unaudited)
Notes and interest
receivable -
Convertible Preferred related parties,
Stock Common Stock from issuance of, Deferred
------------------------ ------------------ or collateralized compensation
(thousands of dollars Capital in excess Accumulated by, common from stock
and shares) Shares Amount Shares Amount of par value deficit stock options
- ---------------------- ----------- ---------- -------- -------- ----------------- ------------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
September 30, 1998 316 $1 11,272 $11 $69,284 $(43,002) $(7,773) $(3,775)
Common stock issued to
purchase minority interests
in subsidiaries 70 -- 519
Common stock issued for
cash, including exercise of
stock options 776 1 3,774
Value of common stock warrants
issued under terms of
existing debt
agreement -- -- 247
Common stock issued for
rights to technology 60 -- 375
Common stock issued on
conversion of preferred stock
and in payment of accrued but
undeclared dividends (299) -- 422 -- 177 (177)
Return of previously issued
common stock by a director (14) -- --
Value of common stock
options issued in
connection with debt
financing -- -- 175
Preferred stock issued
for cash, net of
offering costs 1 -- 899
Value of common stock
warrants issued in
connection with redeemable
convertible preferred
stock and convertible debt 2,435
Value of common stock
warrants issued in
connection with
extension of note payable
due date -- -- 206
Write-down of notes
receivable - related parties 749
Amortization of deferred
compensation from stock
options 1,074
Net loss for the nine
months ended
June 30, 1999 (15,142)
- ---------------------- ----------- ---------- -------- -------- ----------------- ------------- ---------------- ------------
Balances at
June 30, 1999 18 $1 12,586 $12 $78,091 $(58,321) $(7,024) $(2,701)
=========== ========== ======== ======== ================= ============= ================ ============
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
6
<PAGE>
<TABLE>
<CAPTION>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended June 30,
(thousands of dollars) 1998 1999
- ------------------------------------------------------------------------------------------------- ----------------- -------------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (6,067) $(15,142)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 256 1,432
Write-down (write-up) of notes receivable - related parties (1,095) 749
Interest expense related to amortization of debt discount and debt issuance costs 2,266 1,160
Amortization of deferred compensation from stock options 732 1,074
Minority interest in net losses of consolidated subsidiaries (321) --
Loss (gain) on disposition of equipment (26) 153
Asset impairment charge -- 556
Increase (decrease) from changes in assets and liabilities, net of effects from
investing and financing activities 3,136 (4,370)
----------------- -------------
Net cash used in operating activities (1,119) (14,388)
----------------- -------------
Cash flows from investing activities:
Purchase of property, plant and equipment and facilities held for sale (33,716) (685)
Proceeds from sale of equipment -- 170
Purchase of rights to technology -- (127)
Issuance of notes receivable (1,257) --
Proceeds from facility transferred under note receivable arrangement 288 392
Deposits collateralizing letters of credit (588) --
Proceeds from decrease in restricted investment -- 50
----------------- -------------
Net cash used in investing activities (35,273) (200)
----------------- -------------
Cash flows from financing activities:
Proceeds from issuance of notes payable and warrants 32,570 10,453
Payments on notes payable (6) (4,655)
Payments on notes payable - related parties (342) (147)
Proceeds from issuance of preferred stock and warrants, net 90 6,367
Proceeds from issuance of common stock, net 1,761 3,775
Proceeds from receivable - stock subscriptions 577 --
Proceeds from notes receivable - related parties, collateralized by common stock 314 --
----------------- -------------
Net cash provided by financing activities 34,964 15,793
----------------- -------------
Net increase (decrease) in cash and cash equivalents (1,428) 1,205
Total cash and cash equivalents, beginning of period 4,780 727
----------------- -------------
Total cash and cash equivalents, end of period $3,352 $ 1,932
================= =============
Supplemental schedule of non-cash investing and financing activities:
Common stock issued to purchase minority interests in subsidiaries $ -- $ 519
Common stock issued on conversion of preferred stock and undeclared dividends -- 2,444
Common stock issued for rights to technology -- 375
Notes payable issued for rights to technology -- 426
Property, plant and equipment acquired through reduction of accounts receivable -- 413
Notes payable issued for equipment 702 424
Common stock issued on conversion of notes payable and related accrued interest 8,179 --
Common stock issued for notes receivable - related parties 45 --
Notes receivable issued for sale of synthetic fuel facility 6,500 --
Notes payable and accrued interest that were refinanced 2,040 --
Preferred stock dividends not accrued or paid 233 284
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
7
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
----------
1. Nature of Operations and Basis of Presentation
Covol Technologies, Inc. and Subsidiaries' ("Covol") primary business is to
commercialize its binder technologies which are used to recycle waste
by-products from the coal, steel and other industries into marketable fuel
and resources. Through June 30, 1998, Covol's focus was on the construction
of facilities and the licensing of its binder technologies to entities that
constructed facilities that convert coal fines into synthetic fuel
briquettes. At June 30, 1999, Covol and its licensees were operating 28
facilities in ten states at various levels of production, including four
facilities which are using a technology that Covol acquired during the past
nine months. Covol is actively seeking to sell its four owned facilities.
Although there can be no assurance that the facilities will be sold, Covol
has entered into a non-binding letter of intent for the sale of one of
these facilities. Covol has entered into a separate non-binding letter of
intent to sell Covol's synthetic fuel business, including the remaining
three Covol-owned facilities and royalty interests from third-party
licensees. Covol has no current plans to construct additional synthetic
fuel facilities.
There are 24 synthetic fuel plants that utilize Covol's patented technology
and from which Covol intends to earn license fees. These facilities do not
presently operate at levels needed to generate significant revenues to
Covol. Improved operations at each of these plants depend on the ability of
the plant owner to produce synthetic fuel that meets market specifications
in order for the plant owner to market the synthetic fuel. Covol is
assisting the plant owners in their efforts to overcome production and
marketing problems. Covol anticipates that recurring license fees or
royalties from the production and sale of synthetic fuel will continue to
increase during 1999 and in 2000. As production levels increase, sales of
the binder materials by Covol to its licensees are expected to increase
proportionately. Funds received by Covol from these activities are not
expected to be sufficient to cover Covol's operating costs and expenses
until 2000.
In order for operating activities to produce significant positive cash
flows, Covol and its licensees must successfully address certain operating
issues and marketing difficulties. These problems have delayed Covol's
expected growth in license fees, and have resulted in lower than expected
cash flows and higher than expected capital requirements. Operating issues
which must be addressed include, but are not limited to, feedstock
availability, moisture content, Btu content, correct application of binder
formulation, operability of equipment, product durability, resistance to
water absorption and overall costs of operations, which in many cases to
date have resulted in unit costs in excess of synthetic fuel sale prices.
Marketing difficulties which must be addressed relate to market acceptance
of products manufactured using our technology. Industrial coal users must
be satisfied that the synthetic fuel is a suitable substitute for standard
coal products. Moisture content, hardness, special handling requirements
and other characteristics of the synthetic fuel product may affect its
marketability and its sales price. Many industrial coal users are also
limited in the amount of synthetic fuel product they can purchase from us
and our licensees because they have committed to purchase a substantial
portion of their coal requirements through long-term contracts. Reliance on
spot markets and the overall downward trend in coal prices have generally
produced lower sale prices compared to long-term coal supply contracts in
the utility industry. To date, our owned facilities and licensees have
secured contracts for the sale of only a portion of their production. The
suitability of synthetic fuel as a coal substitute, particularly the
quality characteristics of synthetic fuel, and the traditional long-term
supply contract practices of fuel buying in the utility industry have made
the identification of purchasers of synthetic fuel difficult. Covol
believes that once initial market resistance is overcome, long-term
contracts will be secured for the synthetic fuel, and that Covol and its
licensees will be able to market all synthetic fuel produced at prices
similar to coal.
8
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
----------
Covol's short-term existence depends on the procurement of additional
financing and the extensions of existing debt repayment terms in order to
enable it to maintain adequate liquidity until it can sell its facilities
held for sale or consummate the transactions contemplated by the letters of
intent.
During November 1998, Covol issued common stock and common stock warrants
for total net proceeds of approximately $3,730,000. During January 1999,
Covol issued convertible preferred stock and warrants for total net
proceeds of approximately $900,000. During March 1999, Covol issued
convertible secured debt, convertible redeemable preferred stock and common
stock warrants for total net proceeds of approximately $14,800,000. Covol
is currently in discussions with creditors to whom debt is owed in August
1999 and is also in discussions with several potential lenders with regard
to its short-term financing needs. Covol is using all available resources
to remain solvent and will continue to pursue the extension of due dates of
debt, additional financing, the sale of its facilities held for sale, and
consummation of the transactions contemplated in the letters of intent.
Covol believes it will be able to extend the repayment terms of its debt
and that the funds raised in additional financings and excess proceeds from
the sale of facilities will be sufficient to fund Covol's operations until
its operating activities begin producing positive cash flow or it can
consummate the transactions contemplated by the letters of intent.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission for quarterly reports on Form 10-Q. In the opinion of
management, all adjustments considered necessary for a fair presentation
have been included. All adjustments, except as described in the following
two paragraphs, consist of normal recurring adjustments. The results of
operations for the periods presented are not necessarily indicative of the
results to be expected for the full year. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. It is suggested that these financial statements be
read in conjunction with the consolidated financial statements and notes
thereto included in Covol's Annual Report on Form 10-K for the year ended
September 30, 1998 and in Covol's Quarterly Reports on Form 10-Q for the
quarters ended December 31, 1998 and March 31, 1999.
During the three months ended June 30, 1999, Covol terminated three
employees to whom compensatory stock options were granted in prior years.
These stock options were not forfeited upon termination. During the three
months ended June 30, 1999, total amortization of deferred compensation
from stock options approximated $749,000, of which approximately $600,000
was for the write off of the unamortized deferred compensation related to
these individuals.
In May 1995, Covol entered into an agreement with Geneva Steel Company to
build and operate a commercial briquetting facility. The facility never
reached commercial operating levels, but was held for other uses, including
potential relocation to another site for use in the production of synthetic
fuel or in other applications. In early 1999, Geneva filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code
due to a lack of sufficient liquidity. Primarily as a result of this event,
Covol moved a substantial portion of the equipment comprising the facility
from the Geneva site to another location where it is being used in a
different application of Covol's technology. Certain assets at the Geneva
site, primarily consisting of leasehold improvements on the property where
the facility was located, were abandoned. The carrying value of these
assets, totaling approximately $556,000, was written off during the quarter
ended March 31, 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts
9
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
----------
of revenues and expenses during the reporting periods. Actual results could
differ from those estimates and these differences could be material.
Restatements and Reclassifications
After discussion with the staff of the Securities and Exchange Commission
("SEC") in September 1999, the Company has restated its 1999 and 1998
financial statements for the following items:
o To recognize cash received for non-refundable advance license fees on
a straight-line basis over the contractual term of the license
agreements, which is through 2007. Previously, the Company recognized
non-refundable advance license fees when received which was normally
when certain synthetic fuel facility construction milestones were met
or when the facilities were certified operational for their intended
use. This change in accounting policy does not affect the timing of
cash flows, and all amounts which have been received are
non-refundable. Also, the Company believes prior disclosures
concerning the amount and nature of these one-time fees were complete
and accurate and accordingly, no changes are being made to those
disclosures. The total amount of revenue ultimately recognized over
the period covered by the Company's license agreements with licensees
will not change, only the period in which the revenue is recognized.
o To de-recognize the sale of the Utah facility in 1997 and account for
this transaction in a manner similar to SEC guidance for the
divestiture of a business operation, as outlined under Staff
Accounting Bulletin (SAB) Topic 5:E. The note receivable related to
this transaction has been classified as a facility transferred under
note receivable arrangement. All note payments, including interest,
reduce the carrying amount of the recorded asset.
o To reverse depreciation expense recorded on assets not in use and
reflect an asset impairment charge in an earlier period (March 31,
1999) than originally reported.
The combined effect of all of the above items is to increase the net loss
for the nine months ended June 30, 1998 by $7,496,000 and to decrease the
net loss for the nine months ended June 30, 1999 by $374,000, as shown in
the following table.
<TABLE>
<CAPTION>
(thousands of dollars) 1998 1999
---------------------------------------------------------------------------------------------------------------------
As As As As
Reported Restated Reported Restated
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Total revenues $12,352 $5,044 $3,422 $4,102
Operating costs and expenses 10,722 10,669 15,210 15,297
------------------------------- -------------------------------
Operating income (loss) 1,630 (5,625) (11,788) (11,195)
Other income (expense) (201) (442) (3,728) (3,947)
------------------------------- -------------------------------
Net income (loss) $1,429 ($6,067) ($15,516) ($15,142)
=============================== ===============================
Basic and diluted income (loss) per
common share $0.11 ($0.65) ($1.33) ($1.28)
=============================== ===============================
</TABLE>
In addition to the above restatements, certain prior year amounts were
reclassified to conform with the current year's presentation. The
reclassifications had no effect on net loss or total assets.
10
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
----------
2. Change in Carrying Value of Note Receivable
During the nine months ended June 30, 1999, Covol increased the allowance
on the $5,000,000 face value note receivable from a stockholder by
approximately $749,000, resulting in an adjusted carrying value for the
note of $860,000 as of June 30, 1999. None of this adjustment in the
allowance was attributable to the three-month period ended June 30, 1999.
During the three and nine months ended June 30, 1998, Covol decreased the
allowance by approximately $532,000 and $1,095,000, respectively. The
changes in the allowance were based solely on changes in the market value
of Covol's common stock and common stock options held as collateral for the
note receivable. The allowance is subject to future fluctuations in the
value of Covol's common stock. During the nine months ended June 30, 1999,
Covol received payments totaling $515,000 from the note holder. This amount
represented the scheduled payments as required under the note.
11
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
----------
3. Notes Payable
<TABLE>
<CAPTION>
Notes payable consist of the following:
September 30, June 30,
(thousands of dollars) 1998 1999
-------------------------------------------------------------------------------------------- ----------------- ---------------
<S> <C> <C>
Note payable to a corporation, bearing interest at 15%, collateralized by a
synthetic fuel facility in Pennsylvania, held for sale, with all unpaid
principal and interest due at the earlier of the sale of the facility or
August 31, 1999. $5,800 $5,800
Note payable to a corporation bearing interest at prime (8.0% at June 30,
1999) plus 2%, collateralized by plant and equipment, principal and interest
due December 1999. 2,900 2,900
Note payable to the same corporation referred to in the preceding paragraph,
bearing interest at 6%, principal and interest due January 2000,
collateralized by a coal wash plant in Utah. 4,263 4,301
Notes payable to the same corporation referred to in the preceding two
paragraphs, bearing interest at 6%. 50% of accrued interest due February 2000
with remaining accrued interest and principal due February 2001.
Collateralized by a synthetic fuel facility in West Virginia, held for sale,
and license fees payable to Covol from the production and sale of synthetic
fuel from four synthetic fuel facilities. 6,680 6,500
Note payable to a limited liability company bearing interest at 10%,
collateralized by a synthetic fuel facility in West Virginia, held for sale,
and license fees payable to Covol from the production and sale of synthetic
fuel from two synthetic fuel facilities. Beginning July 1999 through May 2000,
monthly payments of $350 are required, with all unpaid principal and interest
due June 2000. Alternatively, if Covol sells the facility before the loan
repayment date, Covol must repay the loan from sale proceeds. 8,242 9,191
Convertible secured note payable to an investment company issued at a
discount, bearing a stated interest rate of 2.5% on the $20,000 face amount.
The note is due March 2004, but is expected to be redeemed or converted into
common stock by the note holder prior to maturity if not redeemed earlier by
Covol. Interest is payable semiannually on January 1 and July 1. The note is
collateralized by license fees payable to Covol from the production and sale
of synthetic fuel from four synthetic fuel facilities located in Virginia and
West Virginia. -- 9,503
Note payable to a corporation, bearing interest at 14%, collateralized by a
promissory note receivable and by certain future license fees receivable by
Covol. Interest is payable monthly and $1,000 of principal is due December
1999 and $3,000 of principal is due April 2000. 4,000 4,000
Note payable to the same corporation referred to in the preceding paragraph,
bearing interest at 14%, paid in March 1999. 4,000 --
Other 94 859
----------------- ---------------
35,979 43,054
Less: current portion 22,049 20,359
================= ===============
Total non-current $13,930 $22,695
================= ===============
</TABLE>
12
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
----------
Substantially all of Covol's property, plant and equipment and facilities
held for sale are collateral for the notes payable. The weighted average
interest rate on notes payable was 8.5% at September 30, 1998 and 15.9% at
June 30, 1999.
Interest Costs
During the nine months ended June 30, 1999, Covol incurred total interest
cost of approximately $4,394,000 (including approximately $1,160,000 of
amortization of debt discount and debt issuance costs), none of which was
capitalized. During the nine months ended June 30, 1998, Covol incurred
total interest cost of approximately $3,682,000 (including approximately
$2,266,000 of non-cash interest expense resulting from issuance of
convertible debt and warrants at a discount), of which approximately
$1,390,000 was capitalized.
4. Basic and Diluted Loss per Share
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
(thousands of dollars and shares, except per-share data) 1998 1999 1998 1999
---------------------------------------------------------- -------------- --------------- ---------------- ---------------
Numerator:
<S> <C> <C> <C> <C>
Net loss $(1,361) $(5,527) $(6,067) $(15,142)
Preferred stock dividends (undeclared) (85) (170) (279) (307)
Imputed preferred stock dividends -- (313) -- (353)
============== =============== ================ ===============
Net loss attributable to common
stockholders $(1,446) $(6,010) $(6,346) $(15,802)
============== =============== ================ ===============
Denominator - weighted-average shares
outstanding 10,400 12,512 9,720 12,320
============== =============== ================ ===============
Basic and diluted loss per common share $(.14) $(.48) $(.65) $(1.28)
============== =============== ================ ===============
</TABLE>
5. Equity Transactions during the Quarter Ended June 30, 1999 and Subsequent
to June 30, 1999
Conversion of Preferred Stock
In May and June 1999, approximately 114,000 shares of common stock were
issued on conversion of 12,858 shares of Series B preferred stock and 300
shares of Series C preferred stock and related accrued but unpaid
dividends. Subsequent to June 30, 1999, approximately 137,000 shares of
common stock were issued on conversion of 500 shares of Series C preferred
stock and related accrued but unpaid dividends.
Warrants for the Purchase of Common Stock
In connection with the extension of the due date of the $4,000,000 note
payable described in Note 3, the terms of existing warrants for the
purchase of 185,713 shares of common stock were amended to extend the
exercise periods for one year and to lower the exercise prices to current
market value of Covol's common stock. The extended, repriced warrants were
valued at approximately $244,000, which value is being amortized as
interest over the revised term of repayment. A member of Covol's Board of
Directors is affiliated with this corporation.
13
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
----------
Stock Options
During the three months ended June 30, 1999, Covol granted an option for
the purchase of a total of 250,000 shares of common stock to a director and
officer. The exercise price was equal to the market value of Covol's common
stock on the date of grant.
6. Commitments and Contingencies
Commitments and contingencies as of June 30, 1999 not disclosed elsewhere,
are as follows:
Letters of Credit
During fiscal 1998, Covol entered into letter of credit arrangements with a
bank that provide for the issuance of letters of credit totaling up to
$938,000. As of June 30, 1999, there were $698,000 of outstanding letters
of credit. Certificates of deposit totaling $698,000 that are included in
restricted investments in the accompanying balance sheet collateralize
these arrangements.
Legal or Contractual Matters
Included in accrued liabilities at September 30, 1998 and June 30, 1999 is
$755,000 related to construction contracts that contain a "failure to
proceed" liability clause.
During 1997, Covol entered into an agreement to purchase coal fines and
through June 30, 1999 has made payments totaling approximately $3,916,000,
of which $239,000 has been transferred to cost of coal briquetting
operations. The net amount paid has been recorded as advances on
inventories. Covol expects to either utilize or sell these coal fines, at
which time the related costs will be expensed. Under the agreement, Covol
is obligated to pay a total of $5,500,000 between February 1997 and May
2000 for the removal of 2 million tons of coal fines (a price of $2.75 per
ton) from the property. Quarterly payments of approximately $396,000 are
required under the agreement. The agreement also provides for removal of an
additional 500,000 tons at $2.75 per ton. No payment is required for
removal of any coal fines in excess of 2.5 million tons. Covol is seeking
to amend the agreement.
In March 1997, Covol transferred the Utah Synfuel #1 facility to Coaltech.
In connection with this transaction, Utah Synfuel #1 licensed Coaltech to
use Covol's binder technologies for a non-refundable advance license fee of
$1,400,000, which is being recognized as income over the contractual term
of the license agreement of 2007, and a recurring license fee that is
payable quarterly and that is based upon synthetic fuel produced and sold
at the Utah facility by Coaltech. Covol contracted with Coaltech to operate
the facility for which Covol receives a quarterly fee, which is also based
upon synthetic fuel produced and sold. The limited partners of Coaltech
have an option wherein they can require Covol to repurchase this facility
under certain conditions. This put option can be exercised if 1) none of
the limited partners are able to utilize the federal income tax credits
under Section 29 of the tax code, 2) the economic benefits accruing to or
experienced by all of the Coaltech limited partners differ significantly
from what was initially projected, or 3) there is a permanent force majeure
or material damage or destruction of the Utah facility. If the put option
is exercised prior to March 2000, 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 paid to Covol by Coaltech. If the put option is
exercised after March 2000, the option price will be $10. In accordance
with generally accepted accounting principles and after discussions with
the staff of the Securities and Exchange Commission, this transaction has
not been reflected as a sale for accounting purposes. The original cost of
the facility less cash payments received
14
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
----------
from Coaltech, is reflected in the consolidated balance sheet as a facility
transferred under note receivable arrangement.
Additionally, Covol entered into a supply and purchase agreement with
Coaltech wherein Covol agreed to provide to Coaltech coal fines for
processing into synthetic fuel at a price equal to Covol's cost. Covol
agreed to purchase from Coaltech the synthetic fuel produced, at Coaltech's
cost plus one dollar per ton. As a result of this commitment to purchase
Coaltech's production, Covol has experienced losses related to the
write-down of the synthetic fuel purchased to the lower of cost or market.
This write-down to date has approximated 90% of the amount Covol has paid
for the synthetic fuel. Based upon expected manufacturing costs and current
coal prices, Covol expects to incur a loss under this supply and purchase
agreement which will reduce the earned license fees received. Covol
believes that over the life of this arrangement, total earned license fees
will exceed total losses incurred under the supply and purchase agreement.
Also, Covol believes Coaltech cannot require Covol to purchase product for
which Covol does not have third party sales, limiting such losses.
In June 1996, Covol formed Alabama Synfuel #1, Ltd. to construct a
synthetic fuel facility. In connection with the construction of this
facility, Covol entered into a supply agreement for coal fines to be used
at the facility, under which Covol was obligated to purchase a minimum of
20,000 tons of coal fines per month through December 2001. Covol assigned
this agreement to the purchaser of the facility and accordingly, has no
ongoing obligation. Covol has been paid for the coal fines purchased but
has a dispute with the provider of the coal fines for a portion of the coal
fines Covol paid for. The resolution of this dispute is not expected to
have a material impact on Covol.
In December 1996, Covol entered into license agreements with affiliates of
Pace Carbon Fuels, L.L.C. (collectively "Pace") for the use of Covol's
binder technologies at four synthetic fuel manufacturing facilities
developed by Pace. In 1998 Pace requested an adjustment in the license fees
payable to Covol under the license agreements. Upon condition of immediate
payment by Pace of amounts due under the original license agreement, Covol
agreed to a reduction in future earned license fees. This reduction was
accomplished by a ten-year loan agreement whereby Covol would loan to Pace
up to $750,000 each quarter beginning in November 1998. This loan will be
repaid to Covol at the end of the ten years only if the Pace projects have
accumulated sufficient prescribed earnings. Revenues from earned license
fees will be recognized by Covol only to the extent that amounts exceed the
loan commitment. Pace has requested three quarterly loans totaling
$2,250,000. Covol believes that its current loan obligation to Pace is
limited to the earned license fees receivable by Covol for the quarters
ended September 30, 1998 through June 30, 1999, which amounts are estimated
at $854,000 in total. Pace and Covol are renegotiating their license
agreements, which negotiations could result in a reduction and/or deferral
of the receipt of future license royalty payments. Covol expects revised
agreements to replace the ten-year loan arrangements.
In January 1996, a manager of Covol entered property owned by Nevada
Electric Investment Company, a subsidiary of Nevada Power Corporation, in
connection with an offer by Covol to purchase the property, and with
certain other employees of Covol, removed some asbestos over a two-day
period. In May 1996, Covol 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. Covol complied
with the order and in September 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. Covol was served in September 1998 with a grand jury
subpoena for records, with which Covol has complied. Covol does not know
the results of the grand jury inquiry or whether the inquiry is completed.
Covol does not believe that the resolution of this matter will have a
material adverse effect on Covol.
15
<PAGE>
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
----------
In September 1996, Covol entered into an agreement with Coalco Corporation
whereby Coalco was to advise Covol with respect to the financing and sale
of certain synthetic fuel manufacturing facilities. To date, Covol has paid
Coalco approximately $347,000 pursuant to the agreement. A dispute has
arisen between Covol and Coalco about services rendered or to be rendered
by Coalco and the amount and timing for payment for such services. There
have been ongoing discussions between Covol and Coalco in an attempt to
resolve their differences. The potential liability to Covol is not known.
Covol's management believes the resolution of this dispute could have a
significant financial impact on Covol, which impact is most likely to be a
reduction of future revenues. Pelletco, an affiliate of Coalco, is a
licensee of Covol.
In March 1999, Covol entered into a financing transaction involving the
issuance of convertible preferred stock and a convertible secured note. The
transaction requires, among other things, (1) stockholder approval of the
transaction, (2) registration of common stock into which the securities
issued may be converted, and (3) achievement of earnings targets beginning
in the first quarter of Covol's fiscal year 2000. Covol is preparing for a
special stockholder meeting to seek approval of the financing transaction.
Covol has filed registration statements on Form S-3 to register the common
stock into which the securities issued in the March 1999 financing
transaction are convertible as well as to fulfill other registration
commitments. The SEC has engaged in a review of the registration statements
and Covol's periodic reports under the Securities Exchange Act of 1934, and
accordingly effectiveness of the registration statements has been delayed
beyond what Covol expected while Covol responds to SEC staff comments.
Covol is also marketing its owned synthetic fuel manufacturing facilities
and is assisting licensees with synthetic fuel production issues in order
to improve the likelihood of reaching the required earnings targets.
Failure to comply with these covenants could have serious adverse effects,
including default under the financing agreements.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis should be read in conjunction
with the accompanying unaudited consolidated financial statements and notes
thereto. Covol has restated its 1999 and 1998 financial statements as described
in Note 1 to the financial statements, Nature of Operations and Basis of
Presentation, Restatements and Reclassifications.
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Revenues. Total revenues for the three months ended June 30, 1999 ("1999")
decreased by $1,199,000 to $1,577,000 as compared to $2,776,000 for the three
months ended June 30, 1998 ("1998"). During 1999, Covol recognized license fees
totaling $853,000 while license fees of $226,000 were recognized during 1998.
The license fees in 1999 consisted of recurring license fees or royalty payments
of $626,000 and $227,000 of straight-line amortization of one-time
non-refundable advance license fees. The license fees in 1998 consisted solely
of amortization of one-time non-refundable advance license fees. Recurring
license fees or royalty payments are due quarterly based upon synthetic fuel
produced and sold as reported to Covol by its licensees. Advance license fees
are normally received when construction of the related synthetic fuel facility
begins, when construction is completed, or when certain construction milestones
or other specified conditions are met, but are recognized on a straight-line
basis over the period covered by Covol's license agreements with licensees.
Covol may receive additional advance license fees during 1999 upon the sale of
synthetic fuel facilities currently owned by Covol or upon the achievement of
certain production levels at two other synthetic fuel facilities. Recurring
license fees or royalty payments are expected to increase at moderate levels in
the near term.
Covol provides binder material to its licensees either at a fixed price or at
Covol's cost plus a contracted markup. Covol purchases binder material under a
long-term contract with a large chemical company. Total binder sales to
non-related parties during 1999 were $409,000, with a corresponding direct cost
to Covol of $291,000, excluding related labor and overhead. In 1998, Covol had
no binder sales to non-related parties. Covol had sales of binder and coal fines
to related parties during 1999 totaling $50,000 compared to $1,248,000 during
1998. These revenues resulted primarily from coal fines that were sold at
Covol's cost to a related party under a non-recurring contractual obligation, as
provided for under the binder and license agreement with this entity. Covol
received revenues from binder plant sales of $1,298,000, with a corresponding
cost of $1,095,000, during 1998, while no such sales occurred during 1999.
Synthetic fuel sales were $242,000 in 1999 compared to $0 in 1998 and represent
the sale of product from Covol-owned facilities. This revenue is not expected to
increase significantly because Covol is expecting to sell all of its owned
facilities in the near-term future.
Covol expects an increase during 1999 of production and sales of synthetic fuel
by its licensees as they improve production capability and establish marketing
agreements for the synthetic fuel produced. This will result in a corresponding
increase in earned license fees or royalty payments and sales of binder
products. However, Covol cannot assure increases in license fees, royalty
payments, and binder sales because Covol's licensees must successfully obtain
adequate feedstock or coal fines, process fines into synthetic fuel, and develop
markets for synthetic fuel. Covol believes that its licensees have made progress
in these areas during the quarter ended June 30, 1999, but significant
improvement is still needed and continued progress and eventual success cannot
be assured.
Synthetic fuel is a relatively new product and competes with standard coal
products. Industrial coal users must be satisfied that the synthetic fuel is a
suitable substitute for standard coal products. Moisture content, hardness,
special handling requirements and other characteristics of the synthetic fuel
product may affect its marketability, and sales price. Many industrial coal
users are also limited in the amount of synthetic fuel product they can purchase
because they have committed to purchase a substantial portion of their coal
requirements through long-term contracts. Reliance on spot markets and the
overall downward trend in coal prices in the utility industry have generally
produced lower sales prices compared to long-term coal supply contracts. To
date,
17
<PAGE>
Covol owned facilities and licensees have secured contracts for the sale of only
a portion of their production. Convincing buyers of the suitability of synthetic
fuel as a coal substitute, particularly the quality characteristics of synthetic
fuel, and the traditional long-term supply contract practices of fuel buying in
the utility industry have made the identification of purchasers of synthetic
fuel difficult. Because synthetic fuel is a coal substitute, the market and
price are as broad and varied as the coal market itself. The US coal market
exceeds one billion tons annually, and the prices range from approximately $12
to $35 per ton in the areas where facilities using the Covol technology are
located. Prices are dependent on many factors, including Btu content, ash and
sulfur content, moisture, location, etc. Covol believes that once initial market
resistance is overcome long-term contracts will be secured for the synthetic
fuel, and that Covol and its licensees will be able to market all synthetic fuel
produced at prices similar to coal.
Our accounting and valuation procedures are based on all of the Covol-owned
facilities qualifying for section 29 tax credits so that synthetic fuel
production will continue to be the highest and best use of this equipment and
facilities. If the facilities were used in an alternative application, the
equipment and facilities' carrying value would likely be higher than the fair
value based on the alternative highest and best use, which could result in an
impairment charge at that time.
Operating Costs and Expenses. Operating costs and expenses increased by $923,000
to $5,961,000 during 1999 from $5,038,000 during 1998. Cost of coal briquetting
operations increased $1,457,000 from $1,409,000 during 1998 to $2,866,000 during
1999, and cost of binder and coal fines - related parties decreased $1,049,000
from $1,056,000 during 1998 to $7,000 during 1999. During 1999, Covol incurred
significantly higher operating expenses in connection with the continued
refinement and commercialization of the briquetting process in connection with
the 24 facilities placed in service during 1998, and in particular the four
facilities owned by Covol which are currently held for sale. These expenses
primarily related to labor and operating expenses at the four Covol synthetic
fuel facilities and the wash plant located in Utah, losses related to the
write-down of Coaltech inventory, and costs incurred in providing assistance to
Covol's licensees in resolving ramp-up issues at their synthetic fuel
facilities. Covol expects to realize a gain from the sale of the four facilities
held for sale. Covol expects to continue incurring operating losses from the
facilities until they are sold.
Covol operates one of the synthetic fuel facilities for Coaltech, a partnership
for which Covol is the general partner and 1% owner. Under this operating
agreement, Covol is contractually obligated to purchase the synthetic fuel
produced by Coaltech at cost plus $1 per ton. Production of synthetic fuel from
this facility during 1999 and 1998 was not significant and accordingly, the cost
per ton is well in excess of the current market value. These costs and the
corresponding write-down of this inventory to its market value are included in
the cost of coal briquetting operations. The write-down was approximately
$800,000 during 1999 and $900,000 during 1998. The excess cost per ton should
decrease in the remainder of 1999 as production volumes at the Coaltech facility
increase.
Covol believes Coaltech cannot require Covol to purchase product for which Covol
does not have third party sales, limiting such losses. Covol has operated the
Utah facility at a loss because of the need to gain operating experience (it was
the first synthetic fuel facility Covol built and operated), test alternative
production methods, maintain operational status for Section 29 qualification,
maintain the relationship with Coaltech partners, and other related business
reasons.
Selling, general and administrative expenses increased $227,000 or 20% to
$1,338,000 during 1999 from $1,111,000 for 1998. The largest components of
selling, general and administrative expenses for 1999 and 1998 were payroll,
professional services, and travel expenses. Payroll costs increased
approximately $148,000 from 1998 to 1999 due to increased headcount. Changes in
the other categories from year to year were not material. Amortization of
intangible assets increased from $0 in 1998 to approximately $113,000 in 1999,
primarily as a result of the late 1998 exchange of common stock of Covol for
limited partnership interests.
Research and development costs increased $73,000 to $154,000 from 1998 to 1999
primarily because Covol has focused additional personnel and resources on
further refinement of its binder technologies relative to the
18
<PAGE>
synthetic fuel industry and to a lesser extent as a result of the application of
its binder technologies into other areas.
Compensation expense from stock options, stock warrants, and issuance of common
stock increased $463,000 to $749,000 for 1999 from $286,000 for 1998. This
expense relates to options granted in prior periods that vest over several years
and the compensation value that is being recognized as an expense over the
vesting period. During 1999, Covol terminated three employees to whom
compensatory stock options were granted in prior years. These stock options were
not forfeited upon termination. In 1999, approximately $600,000 of expense was
for the write off of the unamortized deferred compensation related to these
individuals.
Other Income and Expense. During 1999, Covol had net other expenses of
$1,699,000 compared to $901,000 of net other income for 1998. This increase of
$2,600,000 in net expense relates primarily to an increase in interest expense
of $1,981,000 and a change between periods of $532,000 in the mark-to-market
adjustment of the carrying value of the related party note receivable
collateralized by common stock.
Interest expense in 1998 was $0 because all interest costs were capitalized as
part of the costs of construction of synthetic fuel facilities. Interest expense
of $1,981,000 in 1999 consisted of interest accrued on notes payable used to
finance the construction of synthetic fuel facilities held for sale and for
operating purposes. Interest expense has increased by approximately $850,000 per
quarter as a result of the debt issued in March 1999. Interest expense will
decrease as a result of any future repayments of debt related to the sale of
facilities held for sale.
During 1996, Covol sold certain construction companies and received as
consideration a $5,000,000 note receivable ("Note"). The Note is "marked to
market" each quarter based upon the market value of Covol's common stock and is
reflected in the consolidated balance sheet at the underlying value of the
collateral. This adjustment resulted in a write-up of $532,000 during 1998,
compared to no adjustment during 1999 for a net change of $532,000 between
periods. As of June 30, 1999, the Note had a carrying value of $860,000.
Net loss. For 1999, the net loss of $5,527,000 represented a change of
$4,166,000 from the net loss of $1,361,000 reported for 1998. This is primarily
due to the increase in cost of briquetting operations, the increase in
amortization of deferred compensation from stock options, and the increase in
interest expense in 1999. Covol did not recognize any income tax benefit in 1999
or 1998 since the realization of its deferred tax asset of approximately
$16,000,000, consisting primarily of net operating loss carryforwards, is
dependent on generation of future taxable income.
Nine Months Ended June 30, 1999 Compared to Nine Months Ended June 30, 1998
Revenues. Total revenues for the nine months ended June 30, 1999 ("1999")
decreased by $942,000 to $4,102,000 as compared to $5,044,000 for the nine
months ended June 30, 1998 ("1998"). During 1999, Covol recognized license fees
totaling $2,140,000 while license fees of $428,000 were recognized during 1998.
The license fees in 1999 consisted of recurring license fees of $1,460,000 and
$680,000 of amortization of one-time non-refundable advance license fees. The
license fees in 1998 consisted solely of amortization of one-time non-refundable
advance license fees.
Total binder sales to non-related parties during 1999 were $1,365,000, with a
corresponding direct cost to Covol of $941,000. In 1998, Covol had no binder
sales to non-related parties. Covol had sales of binder and coal fines to
related parties during 1999 totaling $233,000 compared to $3,243,000 during
1998. These revenues resulted primarily from coal fines that were sold at
Covol's cost to a related party under a non-recurring contractual obligation, as
provided for under the binder and license agreement with this entity. Covol
received revenues from binder plant sales of $1,298,000, with a corresponding
cost of $1,095,000, during 1998, while no such sales occurred during 1999.
19
<PAGE>
Synthetic fuel sales were $242,000 in 1999 compared to $5,000 in 1998 and
represent the sale of product from Covol-owned facilities. This revenue is not
expected to increase significantly because Covol is expecting to sell all of its
owned facilities in the near-term future.
Operating Costs and Expenses. Operating costs and expenses increased by
$4,628,000 to $15,297,000 during 1999 from $10,669,000 during 1998. Cost of coal
briquetting operations increased $6,230,000 from $2,457,000 during 1998 to
$8,687,000 during 1999, and cost of binder and coal fines - related parties
decreased $3,031,000 from $3,073,000 during 1998 to $42,000 during 1999. During
1999, Covol incurred significantly higher operating expenses in connection with
the continued refinement and commercialization of the briquetting process in
connection with the 24 facilities placed in service during 1998, and in
particular the operating costs of the four facilities owned by Covol which are
currently held for sale. These expenses primarily related to labor and operating
expenses at the four Covol synthetic fuel facilities and the wash plant located
in Utah, losses related to the writedown of Coaltech inventory, and costs
incurred in providing assistance to Covol's licensees in resolving ramp-up
issues at their synthetic fuel facilities.
Covol is contractually obligated to purchase the synthetic fuel produced by
Coaltech at cost plus $1 per ton. Production of synthetic fuel from this
facility during 1999 and 1998 was not significant and accordingly, the cost per
ton is well in excess of the current market value. These costs and the
corresponding write-down of this inventory to its market value are included in
the cost of coal briquetting operations. The write-down was approximately
$2,700,000 during 1999 and $1,900,000 during 1998. The excess cost per ton
should decrease as 1999 production volumes at the Coaltech facility increase.
Covol expects to realize a gain from the sale of the four facilities held for
sale. Covol expects to continue incurring operating losses until the facilities
are sold.
Asset Impairment Charge. In May 1995, Covol entered into an agreement with
Geneva Steel Company to build and operate a commercial briquetting facility. The
facility never reached commercial operating levels, but was held for other uses,
including potential relocation to another site for use in the production of
synthetic fuel or in other applications. In February 1999, Geneva filed a
voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code due to a lack of sufficient liquidity. Primarily as a result of this event,
Covol moved a substantial portion of the equipment comprising the facility from
the Geneva site to another location where it is being used in a different
application of Covol's technology. Certain assets at the Geneva site, primarily
consisting of leasehold improvements on the property where the facility was
located, were abandoned. The carrying value of these assets, totaling
approximately $556,000, was written off during 1999.
Selling, general and administrative expenses increased $497,000 or 17% to
$3,500,000 during 1999 from $3,003,000 for 1998. Except for amortization of
intangible assets during 1999 and commissions in 1998, the largest components of
selling, general and administrative expenses for both 1999 and 1998 were
payroll, professional services, and travel expenses. Payroll costs increased
approximately $320,000, professional services increased approximately $110,000
and travel increased approximately $50,000 from 1998 to 1999, due primarily to
increased headcount and higher legal costs. Amortization of intangible assets
increased approximately $305,000 related to the late 1998 exchange of common
stock of Covol for limited partnership interests. Commission expense decreased
approximately $320,000 due primarily to a nonrecurring commission in 1998
related to a licensee relationship. Changes in the other categories from year to
year were not material.
Research and development costs increased $188,000 to $497,000 from 1998 to 1999
primarily because Covol has focused additional personnel and resources on
further refinement of its binder technologies relative to the synthetic fuel
industry and to a lesser extent as a result of the application of its binder
technologies into other areas.
Compensation expense from stock options, stock warrants, and issuance of common
stock increased $342,000 to $1,074,000 for 1999 from $732,000 for 1998. This
expense relates to options granted in prior periods that vest over several years
and the compensation value that is being recognized as an expense over the
vesting period. During 1999, Covol terminated three employees to whom
compensatory stock options were granted in prior years. These stock options were
not forfeited upon termination. In 1999, approximately $600,000 of expense was
for the write off of the unamortized deferred compensation related to these
individuals.
20
<PAGE>
Other Income and Expense. During 1999, Covol had net other expenses of
$3,947,000 compared to $442,000 for 1998. This increase of $3,505,000 relates
primarily to a change between periods of $1,844,000 in the mark-to-market
adjustment of the carrying value of the related party note receivable
collateralized by common stock, an increase in interest expense of $2,102,000,
and a decrease in minority interest in losses of consolidated subsidiaries of
$321,000, partially offset by an increase in interest income of $935,000.
During 1996, Covol sold certain construction companies and received as
consideration a $5,000,000 note receivable ("Note"). The Note is "marked to
market" each quarter based upon the market value of Covol's common stock and is
reflected in the balance sheet at the underlying value of the collateral. This
adjustment resulted in a write-down of $749,000 during 1999, compared to a
write-up of $1,095,000 during 1998 for a net change of $1,844,000. A $515,000
payment on this Note during 1999 was included in interest income for 1999.
Interest expense in 1998 of $2,292,000 consisted primarily of expense based upon
the issuance of convertible debt and warrants at a discount. Interest expense of
$4,394,000 in 1999 consisted of interest accrued on notes payable used to
finance the construction of synthetic fuel facilities held for sale and for
operating needs and $1,160,000 of amortization of debt discount. Interest
expense has increased by approximately $850,000 per quarter as a result of the
debt issued in March 1999. Interest expense will decrease as a result of any
future repayments of debt related to the sale of facilities held for sale.
During September 1998, Covol offered the limited partners of Utah Synfuel #1 and
Alabama Synfuel #1 common stock of Covol in exchange for their limited
partnership interests. These exchanges, most of which were accounted for in
September 1998, were substantially completed by November 1998, at which time
Utah Synfuel #1 became a wholly-owned subsidiary of Covol and Alabama Synfuel #1
became a 98%-owned subsidiary of Covol. As a result of these exchanges, minority
interest in the losses of consolidated subsidiaries decreased from approximately
$321,000 in 1998 to approximately $0 in 1999. Covol believes the combined
operations of these partnerships will result in operating losses in the
near-term future, all of which losses will now be included in Covol's statement
of operations.
Net loss. For 1999, the net loss of $15,142,000 represented a change of
$9,075,000 from the net loss of $6,067,000 in 1998. This is primarily due to the
increase in cost of briquetting operations, the asset impairment charge, the
increase in interest expense, and the change between periods of $1,844,000 in
the mark-to-market adjustment of the carrying value of the related party note
receivable collateralized by common stock. Covol did not recognize any income
tax benefit in 1999 or 1998 since the realization of its deferred tax asset,
consisting primarily of net operating loss carryforwards, is dependent on
generation of future taxable income.
Liquidity and Capital Resources
Liquidity. During the fiscal year 1998, Covol and its licensees completed the
construction of and began operations at 24 synthetic fuel facilities. Covol
currently owns four facilities which it constructed and which are being offered
for sale and has entered into a non-binding letter of intent for the sale of one
of these facilities. Covol anticipates sale of the facilities before December
31, 1999. Proceeds from the sale of these facilities will be used to retire debt
that was incurred principally in connection with the construction and operation
of these facilities and for working capital needs. Total operating expenses
associated with the four owned facilities cost approximately $700,000 per month
during the most recent quarter. These operating expenses fluctuate depending on
the level of activity at the owned facilities.
21
<PAGE>
Net cash used in operating activities for the nine months ended June 30, 1999
("1999") was $14,388,000 compared to $1,119,000 of cash used during the nine
months ended June 30, 1998 ("1998). Most of this change in cash flow from
operations is attributable to the 1999 net loss of $15,142,000 as compared to
$6,067,000 in 1998. Covol has been able to fund its operating activities,
including the continued refinement and commercialization of its patented binder
technologies, through the incurrence of debt and the issuance of convertible
preferred stock, common stock and common stock warrants. During 1999, proceeds
from the issuance of notes payable totaled approximately $10,453,000, proceeds
from the issuance of preferred stock totaled $6,367,000 and proceeds from the
issuance of common stock totaled $3,775,000.
Capital Resources. During 1999, Covol's investing activities were not
significant. Investing activities in 1998 were significant and consisted
primarily of the purchase of property, plant and equipment and the four
facilities held for resale, with most of the funds for these activities coming
from the issuance of notes payable ($32,570,000) and from working capital. Covol
believes that funds required for investing activities will continue to be
significantly lower during 1999 as compared to 1998 because the construction of
synthetic fuel facilities that qualified for federal income tax credits under
Section 29 of the IRC were completed during fiscal 1998. In order to receive tax
credits under IRC Section 29, the synthetic fuel sold must be produced at a
facility placed in service by June 30, 1998.
In June 1999, Covol announced that it had entered into two non-binding letters
of intent with an affiliate of a major U.S. electric utility company. One letter
of intent is for the sale of a single synthetic fuel facility. The other letter
of intent, if fully consummated, would result in the sale of Covol's synthetic
fuel business, including the remaining three Covol-owned facilities and royalty
interests from third-party licensees. Covol's long-term existence depends on the
ability of Covol's licensees to produce and sell synthetic fuel at sufficient
levels to generate earned license fees or royalties to Covol in amounts greater
than operating expenses.
There are 24 synthetic fuel plants that utilize Covol's patented technology and
from which Covol intends to earn license fees. These facilities do not presently
operate at levels needed to generate significant revenues to Covol. Improved
operations at each of these plants depend on the ability of the plant owner to
produce synthetic fuel that meets market specifications in order for the plant
owner to market the synthetic fuel. Covol is assisting the plant owners in their
efforts to overcome production and marketing problems. Covol anticipates that
earned license fees or royalties from the production and sale of synthetic fuel
will continue to increase during 1999 and in 2000. As production levels
increase, sales of the binder materials by Covol to its licensees are expected
to increase proportionately. Funds received by Covol from these activities are
not expected to be sufficient to cover Covol's operating costs and expenses
until 2000.
In order for operating activities to produce significant positive cash flows,
Covol and its licensees must successfully address certain operating issues and
marketing difficulties. These problems have delayed Covol's expected growth in
license fees, and have resulted in lower than expected cash flows and higher
than expected capital requirements. Operating issues which must be addressed
include, but are not limited to, feedstock availability, moisture content, Btu
content, correct application of binder formulation, operability of equipment,
product durability, resistance to water absorption and overall costs of
operations, which in many cases to date have resulted in unit costs in excess of
synthetic fuel sale prices. Marketing difficulties which must be addressed
relate to market acceptance of products manufactured using our technology.
Industrial coal users must be satisfied that the synthetic fuel is a suitable
substitute for standard coal products. Moisture content, hardness, special
handling requirements and other characteristics of the synthetic fuel product
may affect its marketability and its sales price. Many industrial coal users are
also limited in the amount of synthetic fuel product they can purchase from us
and our licensees because they have committed to purchase a substantial portion
of their coal requirements through long-term contracts. Reliance on spot markets
and the overall downward trend in coal prices have generally produced lower sale
prices compared to long-term coal supply contracts in the utility industry. To
date, our owned facilities and licensees have secured contracts for the sale of
only a portion of their production. The suitability of synthetic fuel as a coal
substitute, particularly the quality characteristics of synthetic fuel, and the
traditional long-term supply contract practices of fuel buying in the utility
industry have made the identification of purchasers of synthetic fuel difficult.
Covol believes that once initial market resistance
22
<PAGE>
is overcome, long-term contracts will be secured for the synthetic fuel, and
that Covol and its licensees will be able to market all synthetic fuel produced
at prices similar to coal.
Covol's short-term existence depends on the procurement of additional financing
and the extensions of existing debt repayment terms in order to enable it to
maintain adequate liquidity until it can sell its facilities held for sale or
consummate the transactions contemplated by the letters of intent.
During November 1998, Covol issued common stock and common stock warrants for
total net proceeds of approximately $3,730,000. During January 1999, Covol
issued convertible preferred stock and warrants for total net proceeds of
approximately $900,000. During March 1999, Covol issued convertible secured
debt, convertible redeemable preferred stock and common stock warrants for total
net proceeds of approximately $14,800,000. Covol is currently in discussions
with creditors to whom debt is owed in August 1999 and is also in discussions
with several potential lenders with regard to its short-term financing needs.
Covol is using all available resources to remain solvent and will continue to
pursue the extension of due dates of debt, additional financing, the sale of its
facilities held for sale, and consummation of the transactions contemplated in
the letters of intent. Covol believes it will be able to extend the repayment
terms of its debt and that the funds raised in additional financings and excess
proceeds from the sale of facilities will be sufficient to fund Covol's
operations until its operating activities begin producing positive cash flow or
it can consummate the transactions contemplated by the letters of intent.
In connection with the financing Covol obtained in March 1997, Covol has agreed
to certain covenants contained in the recently completed financing documents.
One covenant requires Covol to meet certain earnings targets for the quarter
ending December 31, 1999 and for subsequent quarters. Consolidated earnings
before interest, taxes, depreciation and amortization (EBITDA) and certain other
adjustments, of $5,000,000 is required for the quarter ending December 31, 1999.
The EBITDA target increases in subsequent quarters. It is not known whether or
not Covol will be able to comply with this provision. Covol's current operations
are at levels below this requirement; however, the sale of Covol-owned
facilities held for sale is expected to result in a gain. Additionally,
operating expenses will decrease as a result of the sale of the facilities.
Operation of the synthetic fuel facilities at or near capacity should result in
EBITDA at levels in excess of this requirement. Non-compliance with this
provision would result in an increase in the debt coupon rate by one percentage
point immediately and each 90 days thereafter until cured. Also, the debt would
become immediately convertible. Upon the second event of non-compliance with
this provision, Covol will be required to deposit approximately $3,000,000 into
an escrow account. Failure to make payments into the escrow account results in
royalty payments from the related collateral being made directly to the debt
holders. There are other provisions and covenants in these loan documents that
may restrict or prohibit certain activities.
Covol May Be Adversely Affected By Year 2000 Non-Compliance of Computer
Applications
The Year 2000 issue is the result of computer programs being written to define
the applicable year using two digits rather than four digits. Thus, programs
that are date sensitive may recognize a date using "00" as the year 1900 rather
than 2000. This could result in a systems failure or miscalculations causing
disruptions of operations including a temporary inability to engage in normal
business activities. This systems issue creates risk for Covol from unforeseen
problems in its own computer systems and electronic equipment and from third
parties with which Covol conducts business. Such failures of Covol's and third
parties' computer systems could potentially have a material adverse impact on
Covol's business and results of operations. While the risks discussed in this
section have a possible material impact, management believes the actions and
contingency plans that are being developed and implemented will significantly
reduce the probability and potential impact of these identified risks.
The information systems and electronic equipment utilized in Covol's business
include a computer network system utilized for intra-company communication and
Internet access and an accounting software package utilized for billing,
procurement, payroll and accounting. Non-information technology electronic
equipment includes programmable logic controllers, micro-controllers,
specialized software packages for operations activities and miscellaneous
systems for lab equipment.
23
<PAGE>
As a part of the information technology systems mentioned above, Covol's
computer network system was upgraded in 1998 with year 2000 compliant equipment.
The provider of the accounting software has indicated that this software package
is not currently compliant but can be upgraded at nominal cost. This work will
be undertaken and tested prior to the close of the fiscal year.
All of the synthetic fuel facilities constructed by Covol and its licensees were
completed and placed in service between December 1996 and June 30, 1998, with
the majority being completed during 1998. As such, the electronic equipment
utilized in the facilities is of recent vintage (within 18 months of the June 30
date) and, based on notification from the suppliers, is year 2000 compliant.
Suppliers of the major electronic equipment for Covol's four owned synthetic
fuel facilities have notified Covol that their equipment is compliant. This
includes critical programmable logic controllers, micro-controllers and software
operating packages.
Licensees utilize proprietary technology provided by Covol including flow sheets
and equipment recommended by Covol in the construction of their facilities.
These licensees have represented to Covol that equipment within these facilities
is compliant or that operations will not be impacted in the event of an
equipment failure due to the Year 2000 issue. Malfunctions occurring in the
synthetic fuel operations could potentially have an adverse material effect to
Covol by reducing the sale of binder formulation materials to the facilities by
Covol and the collection by Covol of royalties on the production of synthetic
fuel.
Covol's relationships with its third-party suppliers and transportation
providers is critical to the operation of the synthetic fuel facilities. Covol
is also dependent upon its customers who purchase and consume the synthetic fuel
produced. Covol's suppliers have represented to Covol that their computer
systems and equipment are year 2000 compliant.
The most reasonably likely worst case scenarios would be the extended inability
of major suppliers to deliver binder formulation materials and other bulk
materials required for the operation of the synthetic fuel facilities and the
failure of customers to be able to receive synthetic fuel product due to
unforeseen shutdown due to non-compliant equipment.
As a contingency plan for the reasonably likely worst case events, Covol intends
to stock up on bulk materials in the last half of the fourth quarter of calendar
1999 so that operations can continue for several days into the new year without
interruption. Covol has designed its facilities to accommodate bulk deliveries.
Electrical power suppliers have notified Covol that power interruptions are not
anticipated but that additional crews will be on hand to respond to problems as
they may occur at the change to the new year. Covol and its licensees are also
prepared to bypass automated controls and operate facility systems manually if
the automated control systems fail. As supply contracts are written for
operating materials, Covol is striving to negotiate terms such that year 2000
issues are not an excuse for non-performance.
Costs attributable to Year 2000 issues are expected to be minimal. The only cost
anticipated to date is for the upgrade to Covol's accounting software package.
This cost is estimated to be less than $5,000. Costs associated with increased
levels of bulk materials simply redistributes normal operating costs but does
not affect the ultimate financial performance of Covol.
Covol plans to continue to monitor the Year 2000 issue throughout the remainder
of 1999. Should this monitoring reveal other developments, whether they be
internal or third party, or identify additional electronic equipment and
software that may be at risk, Covol will assess the situation and take
appropriate action. There can be no assurance that Covol will discover all Year
2000 issues in the course of the remainder of 1999 or that Covol will be able to
remedy any or all discoveries in a timely or cost effective manner such that the
Year 2000 issues will not have a material adverse impact on Covol's business,
financial condition and results of operations.
Forward Looking Statements
Statements in this Item 2 regarding Covol's expectations that relate to future
plans, possible transactions, financial results or performance and other
information presented herein that are not purely historical in nature,
constitute
24
<PAGE>
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Although Covol believes that its expectations are
based on reasonable assumptions within the bounds of its knowledge of its
business and operations, there can be no assurance that actual results will not
differ materially from its expectations. There are a number of business factors
which singularly or combined may affect Covol's future operating results. In
addition to matters affecting Covol's industry or the coal industry or the
economy generally, factors which could cause actual results to differ from
expectations set forth in the above identified forward-looking statements
include but are not limited to:
o Ability to successfully negotiate terms and consummate proposed
transactions,
o Ability to sell Company-owned synthetic fuel facilities on favorable
terms,
o Ability to obtain necessary capital or financing,
o Ability to comply with covenants in financing agreements, including
financial performance criteria,
o Ability to conserve capital through cost reductions until operating
revenues exceed expenses,
o Ability of licensees to market synthetic fuel produced, generating
royalties for Covol,
o Ability of licensees to achieve expected production levels at
synthetic fuel facilities,
o Favorable IRS tax treatment,
o Availability of natural resources and suitable raw materials,
o Ability to locate appropriate sites for facilities,
o Ability of Covol to complete specific research and development
projects, and
o Commercial viability of technologies.
See "ITEM 1. BUSINESS--Forward Looking Statements" in Covol's Annual Report on
Form 10-K for the year ended September 30, 1998 for a description of additional
factors which could cause actual results to differ from expectations.
Other Items
Covol has reviewed all recently issued, but not yet adopted, accounting
standards in order to determine their effects, if any, on the results of
operations or financial position of Covol. Based on that review, Covol believes
that none of these pronouncements will have any significant effects on current
or future financial position or results of operations.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Asbestos Investigation. In January 1996, a manager of Covol entered property
owned by Nevada Electric Investment Company, a subsidiary of Nevada Power
Corporation, in connection with an offer by Covol to purchase the property, and
with certain other employees of Covol, removed some asbestos over a two-day
period. In May 1996, Covol 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. Covol complied with
the order and in September 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.
Covol was served in September 1998 with a grand jury subpoena for records, with
which Covol has complied. Covol does not know the results of the grand jury
inquiry or whether the inquiry is completed. Covol does not believe that the
resolution of this matter will have a material adverse effect on Covol.
25
<PAGE>
ITEM 2. CHANGES IN SECURITIES
Recent Sales of Unregistered Securities
The following sets forth all securities issued by Covol within the past fiscal
quarter without registering the securities under the Securities Act of 1933, as
amended. No underwriters were involved in any stock issuances.
The issuance of qualified options is required to be based on market value.
Accordingly, the exercise price is set based on the market price of Covol's
common stock, even though the options convert into restricted stock.
Covol believes that the following issuances of shares of common stock or
securities for contingently issuable shares of common stock were exempt from the
registration requirements of the Securities Act of 1933, as amended, pursuant to
the exemption set forth in Section 4(2) or 4(6) thereof or Regulation D
promulgated thereunder and the certificate for each security bears a restrictive
legend. Each investor made representations to Covol that it was accredited as
that term is defined in Regulation D and that the security was acquired for
investment purposes.
Reference is made to the conversions of series B and series C preferred stock,
to the amendments to the terms of certain warrants for the purchase of common
stock, and the issuance of an option for the purchase of common stock, all as
described in Note 5 to the consolidated financial statements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
27.1 Restated Financial Data Schedule
(b) No reports on Form 8-K were filed during the three months ended
June 30, 1999. A Form 8-K was filed on July 7, 1999 relating to
an event dated June 23, 1999.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COVOL TECHNOLOGIES, INC.
Date: October 6, 1999 By: /s/ Kirk A. Benson
----------------------------------------
Kirk A. Benson, Chief Executive Officer
and Principal Executive Officer
Date: October 6, 1999 By: /s/ Steven G. Stewart
----------------------------------------
Steven G. Stewart, Chief Financial
Officer and Principal Financial Officer
27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED JUNE 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,932
<SECURITIES> 0
<RECEIVABLES> 4,471
<ALLOWANCES> 0
<INVENTORY> 1,683
<CURRENT-ASSETS> 38,002
<PP&E> 16,653
<DEPRECIATION> 2,251
<TOTAL-ASSETS> 72,375
<CURRENT-LIABILITIES> 27,024
<BONDS> 22,695
0
1
<COMMON> 12
<OTHER-SE> 10,045
<TOTAL-LIABILITY-AND-EQUITY> 72,375
<SALES> 1,840
<TOTAL-REVENUES> 4,102
<CGS> 9,670
<TOTAL-COSTS> 9,670
<OTHER-EXPENSES> 2,127
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,394
<INCOME-PRETAX> (15,142)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,142)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,142)
<EPS-BASIC> (1.28)
<EPS-DILUTED> (1.28)
</TABLE>
