-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PFR8jsD+3lsqIf3OFoNBB/HuaNpmzWj0f2mH7K/Xp3UCdxGGjYoyroAB6QEsNq/y +29uav1kCdcKJSJdUULrxA== 0001038838-97-000062.txt : 19970815 0001038838-97-000062.hdr.sgml : 19970815 ACCESSION NUMBER: 0001038838-97-000062 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COVOL TECHNOLOGIES INC CENTRAL INDEX KEY: 0001003344 STANDARD INDUSTRIAL CLASSIFICATION: BITUMINOUS COAL & LIGNITE MINING [1220] IRS NUMBER: 870547337 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27808 FILM NUMBER: 97663954 BUSINESS ADDRESS: STREET 1: 3280 N FRONTAGE RD CITY: LEHI STATE: UT ZIP: 84043 BUSINESS PHONE: 8017684481 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from _______________________________________________ Commission file number 0-27803 COVOL TECHNOLOGIES, INC. (Exact name of registrant specified in its charter) DELAWARE 87-0547337 State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 3280 North Frontage Road, Lehi, Utah 84043 (Address of principal executive offices) (Zip Code) (801) 768-4481 (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 14 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class of Stock Amount Outstanding $.001 par value Common Stock 8,558,123 Shares of Common Stock at August 12, 1997 COVOL TECHNOLOGIES, INC. TABLE OF CONTENTS Page No. Part I - Financial Information Item 1. Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets..............................1 Consolidated Statements of Operations....................2 Consolidated Statements of Cash Flows....................3 Notes to Financial Statements............................4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...............................................9 Part II - Other Information Item 1. Legal proceedings.......................................15 Item 2. Changes in securities...................................15 Item 3. Defaults upon senior securities.........................16 Item 4. Submission of matters to a vote of security holders.....................................16 Item 5. Other information.......................................17 Item 6. Exhibits and reports on Form 8-K........................18 Statements in this Form 10-Q, including those concerning the Registrant's expectations regarding its business, and certain of the information presented in this report, constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. As such, actual results may vary materially from such expectations. For a discussion of the factors which could cause actual results to differ from expectations, please see the caption entitled "Forward Looking Statements" in ITEM 2 hereof. There can be no assurance that the Registrant's results of operations will not be adversely affected by such factors.
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) ------------------- As of As of June 30, September 30, ASSETS 1997 1996 ----------------- ------------------ Current assets: Cash and cash equivalents $ 401,867 $ 490,106 Receivables 310,487 77,744 Receivable - related parties 79,540 0 Inventories 1,739,204 162,757 Advances on inventory 750,000 0 Notes receivable - current 279,942 0 Notes receivable - related parties, current 0 3,733 Prepaid expenses and other current assets 109,100 44,733 ----------------- ------------------ Total current assets 3,670,140 779,073 ----------------- ------------------ Property, plant and equipment, net of accumulated depreciation 10,024,967 7,125,245 ----------------- ------------------ Other assets: Cash surrender value of life insurance 152,112 152,112 Notes receivable - non-current 3,140,053 0 Notes receivable - related parties, non-current 672,125 700,000 Deposits and other assets 113,608 15,642 ----------------- ------------------ Total other assets 4,077,898 867,754 ----------------- ------------------ Total assets $ 17,773,005 $ 8,772,072 ================= ================== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 1,174,477 $ 2,183,278 Payable for coal briquetting equipment 2,255,850 0 Accrued liabilities 134,839 333,936 Notes payable, current 529,224 958,086 Convertible debentures, current 1,696,222 0 Notes payable - related parties, current 821,790 786,000 ----------------- ------------------ Total current liabilities 6,612,402 4,261,300 ----------------- ------------------ Long-term liabilities: Accrued interest payable, non-current 178,681 0 Notes payable, non-current 2,900,011 150,980 Convertible debentures, non-current 1,000,000 0 Deferred compensation 369,462 212,612 ----------------- ------------------ Total long-term liabilities 4,448,154 363,592 ----------------- ------------------ Total liabilities 11,060,556 4,624,892 ----------------- ------------------ Minority interest in consolidated subsidiaries 4,589,514 4,380,544 ----------------- ------------------ Commitments and contingencies (note 7) Stockholders' equity (deficit): Preferred stock: $0.001 par value; authorized: 10,000,000 shares issued and outstanding: $0 at June 30, 1997 and $0 at Sept. 30, 1996 0 0 Common stock: $0.001 par value; authorized: 25,000,000 shares issued and outstanding: 8,469,838 at June 30, 1997 and 7,610,373 at September 30, 1996 8,470 7,610 Common stock to be issued: 40,000 shares at June 30, 1997 and 103,750 at September 30, 1996 40 104 Capital in excess of par value 38,926,763 32,780,515 Capital in excess of par value - common stock to be issued 239,960 934,896 Accumulated deficit (24,107,802) (21,196,476) Notes and interest receivable - related parties from issuance of or collateralized by common stock (net of allowance) (7,566,415) (7,580,071) Deferred compensation from stock options (5,378,081) (5,179,942) ----------------- ------------------ Total stockholders' equity (deficit) 2,122,935 (233,364) ----------------- ------------------ Total liabilities and stockholders' equity (deficit) $ 17,773,005 $ 8,772,072 ================= ==================
The accompanying notes are an integral part of the consolidated financial statements 1
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) ----------------------- Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended June 30, June 30, June 30, June 30, 1997 1996 1997 1996 ------------ ------------- -------------- ------------- Revenues: License fee $ 0 $ 0 $ 1,400,000 $ 0 Synthetic fuel sales 0 33,431 124,341 37,172 Returns on synthetic fuel sales 0 0 (82,500) 0 Binder sales 130,112 0 134,129 0 ------------ ------------- -------------- ------------- Total revenues 130,112 33,431 1,575,970 37,172 ------------ ------------- -------------- ------------- Operating costs and expenses: Cost of briquetting operations 390,224 258,197 1,139,916 688,523 ------- Research and development 92,856 420,050 263,319 945,301 Selling, general and administrative 672,780 1,368,951 1,902,617 3,040,541 Compensation expense on stock options 384,414 1,425,929 933,112 4,315,798 Expense on issuance of common stock 342,805 4,500 383,305 73,623 Minority interest in income of consolidated subsidiaries 27,366 0 178,292 0 ------------ ------------- -------------- ------------- Total operating costs and expenses 1,910,445 3,477,627 4,800,561 9,063,786 ------------ ------------- -------------- ------------- Operating income (loss) (1,780,333) (3,444,196) (3,224,591) (9,026,614) ------------ ------------- -------------- ------------- Other income (expense): Write-down of note receivable (note 4) (100,000) (2,250,000) (150,000) (2,449,575) Interest income 189,559 88,594 449,146 199,950 Interest expense (95,501) (1,558) (301,398) (45,606) Other income (expense) 15,438 (60) 19,891 (144,258) Gain on sale of assets 299,822 0 295,626 0 ------------ ------------- -------------- ------------- Total other income (expense) 309,318 (2,163,024) 313,265 (2,439,489) ------------ ------------- -------------- ------------- Loss from continuing operations before income taxes (1,471,015) (5,607,220) (2,911,326) (11,466,103) Income tax provision 0 0 0 (23,000) ------------ ------------- -------------- ------------- Loss from continuing operations (1,471,015) (5,607,220) (2,911,326) (11,489,103) ------------ ------------- -------------- ------------- Discontinued operations: Loss from discontinued operations 0 0 0 (590,480) Loss on disposal of discontinued operations 0 0 0 (291,025) ------------ ------------- -------------- ------------- Income (loss) from discontinued operations 0 0 0 (881,505) ------------ ------------- -------------- ------------- Net loss $ (1,471,015) $ (5,607,220) $ (2,911,326) $ (12,370,608) ============ ============= ============== ============= Net loss per common share: Loss per share from continuing operations $ (0.18) $ (0.77) $ (0.37 $ (1.72) Loss per share from discontinued operations 0.00 0.00 0.00 (0.13) ------------ ------------- -------------- ------------- Net loss per share (note 2) $ (0.18) $ (0.77) $ (0.37) $ (1.85) ============ ============= ============== ============= Weighted average shares outstanding 8,192,603 7,258,406 7,921,253 6,699,062 ============ ============= ============== =============
The accompanying notes are an integral part of the consolidated financial statements 2
COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) --------------------------------- Nine Months Ended Nine Months Ended June 30, June 30, 1997 1996 ------------------ -------------------- Cash flows from operating activities: Net loss $ (2,911,326) $ (12,370,608) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 176,253 137,003 Common stock issued for settlement and services 383,305 365,956 Write-down of note receivable 150,000 2,449,575 Amortization of deferred compensation on stock options 933,112 4,315,798 Loss on disposal of discontinued subsidiaries 0 291,025 Interest earned on notes receivable - related parties, collateralized by common stock (242,344) (177,189) Loss on sale of assets 4,196 0 Deferred income taxes 0 23,000 Gain applicable to minority interests in subsidiaries 150,970 0 Increase (decrease) from changes in assets and liabilities of continuing operations: Receivables (232,743) (12,376) Receivables - related parties (79,540) 0 Inventories (1,576,447) (22,208) Advances on inventory (750,000) 0 Prepaid expenses and other current assets (64,367) 9,177 Deposits and other assets (97,966) (18,553) Accounts payable (1,008,801) 1,417,862 Payable for coal briquetting equipment 2,255,850 0 Accrued liabilities (199,097) (121,635) Accrued interest payable, non-current 178,681 Deferred compensation 156,850 7,981 Discontinued operations non-cash charges and working capital changes 0 (202,259) ------------- --------------- Net cash used in operating activities (2,773,414) (3,907,451) ------------- --------------- Cash flows from investing activities: Cash paid for property, plant and equipment (6,580,171) (2,569,530) Issuance of notes receivable (49,456) (8,495) Proceeds from notes receivable 129,464 0 Proceeds from notes receivable - related parties 31,608 2,738 Increase in cash surrender value of life insurance 0 (12,500) ------------- --------------- Net cash used in investing activities (6,468,555) (2,587,787) ------------- --------------- Cash flows from financing activities: Proceeds from issuance of limited partnership interests in subsidiaries 350,000 832,500 Payments on distribution to limited partnership interests in subsidiaries (292,000) 0 Proceeds from notes payable 6,597,493 0 Proceeds from notes payable - related party 109,470 0 Payment on notes payable (317,573) (24,494) Payment on notes payable - related parties (73,683) (2,291,426) Proceeds from note receivable - related parties collateralized by common stock 106,000 859,160 Proceeds from issuance of common stock (net) 2,674,023 6,267,031 ------------- --------------- Net cash provided by financing activities 9,153,730 5,642,771 ------------- --------------- Net decrease in cash (88,239) (852,467) Total cash and cash equivalents, beginning of period 490,106 1,291,166 ------------- --------------- Total cash and cash equivalents, end of period $ 401,867 $ 438,699 ============= ================ Supplemental schedule of noncash investing and financing activities: Common stock issued for notes receivable $ 0 $ 6,159,375 Common stock issued in conversion of convertible debentures 1,263,530 0 Obligations assumed in connection with sale of subsidiaries 0 4,636,435 Note receivable for subsidiaries (net of imputed interest) 0 4,349,575 Notes receivable issued for sale of briquetting facility 3,500,000 0
The accompanying notes are an integral part of the consolidated financial statements 3 COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) ----------------------------------- 1. Management Opinion: In the opinion of management, the accompanying financial statements present fairly the financial position of Covol Technologies, Inc. and Subsidiaries (the "Company") as of September 30, 1996 and June 30, 1997, the results of its operations for the three months and nine months ended June 30, 1996 and June 30, 1997 and its cash flows for the nine months ended June 30, 1996 and June 30, 1997. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these financial statements be read in conjunction with the Company's Annual Report included in Form 10-K for the year ended September 30, 1996. 2. Loss Per Share Calculation Weighted average shares include only common shares outstanding. The computation of fully diluted net loss per common share was antidilutive in each period for which a net loss was presented. 3. Inventories and Advances on Inventories Inventories and advances on inventories are stated at the lower of average cost or market, and consist of coal fines, synthetic fuel, binder materials, and coal fines. 4. Change in Estimate of Fair Value of Note Receivable During the three months ended June 30, 1997, the Company increased the allowance for impairment on the $5,000,000 face value note receivable from two stockholders by $100,000 to an adjusted loan value of $1,500,000. The increase in the allowance was based upon a $0.50 per share decrease in the Company's common stock that collateralizes the note receivable. The estimate is subject to future fluctuations due to market changes. (See Part II, Item 5 for discussion of note receivable.) 5. Convertible Debentures AJG Financial Services, Inc. In December 1996, the Company entered into a Debenture Agreement and Security Agreement with AJG Financial Services, Inc., an affiliate of Arthur J. Gallagher, whereby the Company borrowed $1,100,000, and could, under certain circumstances, draw down an additional amount of up to $2,900,000 (for a total borrowed amount of $4,000,000). In consideration for the loan of $1,100,000, the Company issued a Convertible Subordinated Debenture accruing interest at 6% per annum and maturing three years from its date of issuance (the "Subordinated Debenture"). All or a portion of the unpaid principal due on the Subordinated Debenture is convertible into Company common stock. On May 5, 1997, AJG Financial Services, Inc. executed its option to convert the loan of $1,100,000 to an equity position. 4 COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) ---------------------------------------- 5. Convertible Debentures (continued) During the quarter ended June 30, 1997, the Company borrowed $107,827 and borrowed $2,792,172 in the previous quarter ended March 31, 1997 of the $2,900,000 loan available under the Debenture Agreement with AJG Financial Services, Inc. as described above. In consideration for the amounts drawn down, the Company issued Senior Debentures in such amounts accruing interest at prime plus two percent (2%) and maturing three years from the date of issuance (the "Senior Debentures"). The Senior Debentures are collateralized by all real and personal property purchased by the Company with the proceeds of the Senior Debentures. The proceeds of the Subordinated Debentures and the Senior Debentures may be used to satisfy contractual obligations of the Company, for working capital and to purchase equipment to be used to construct synthetic fuel facilities to be managed and/or sold by the Company or affiliates of the Company. PacifiCorp Financial Services, Inc. As a part of its Alabama transaction with PacifiCorp, the Company executed a Convertible Loan and Security Agreement with PacifiCorp Financial Services, Inc. ("PFS") dated March 20, 1997. The agreement provides for the Company to borrow up to $5,000,000 primarily for: completing construction of the Alabama project, acquiring coal fines and for other purposes related to the project. To secure the loan, the Company and Alabama Synfuel #1, Ltd. gave PFS a security interest in all personal and real property assets connected with the Alabama project. The loan accrues interest at prime plus two percent (2%) with interest and principal payable on March 20, 1998. The agreement provides PFS with the option to convert the unpaid principal and interest and any remaining loan commitment amount into shares of the Company's common stock, convertible at $7.00 per share. As of June 30, 1997 the Company has drawn $1,696,222 on the $5,000,000 credit line. 5 COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) ---------------------------------------- 6. Stockholders' Equity The table below presents the activity in stockholders' equity from April 1, 1997 through June 30, 1997.
Notes and interest Common Stock Common Stock to be issued receivable-related ______________________________ ____________________________ parties from Deferred Capital in Capital in issuance of, or compensation excess of excess of Accumulated collateralized on stock Shares Amount par valued Shares Amount par value Deficit by, common stock options --------- ------ ----------- ------- ------ ---------- ------------ ----------------- ------------ Balance at April 1, 1997 7,944,870 $7,945 $35,397,078 0 $0 $0 ($22,636,787) ($7,587,966) ($5,468,745) Common stock issued for 343,996 344 1,768,178 40,000 40 239,960 cash including exercise of stock options (net) Common stock issued in 140,642 141 1,124,992 conversion of convertible debenture Common stock issued in 40,330 40 342,765 settlement Cash received in payment 3,000 on notes receivable-related parties from issuance of common stock Deferred compensation 293,750 (293,750) related to the issuance of stock options at below market value to officers, directors, employees and consultants Amortization of deferred 384,414 compensation on stock options Interest earned on notes (81,449) receivable - related parties from issuance of or collateralized by common stock Write-down of notes 100,000 receivable - related party Net loss for the quarter (1,471,015) ended June 30, 1997 --------- ------ ----------- ------- ------ -------- ------------ ---------- ------------ Balance at June 30, 1997 8,469,838 $8,470 $38,926,763 40,000 $40 $239,960 ($24,107,802) ($7,566,415) ($5,378,081) ========= ====== =========== ======= ====== ======== ============ ==========
6 COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) ---------------------------------------- 7. Contingencies In connection with construction agreements entered into by the Company in December 1996, in order to assure the agreements would be considered binding on the Company, the Company agreed to penalty clauses in the aggregate amount of $3,012,000 if the Company fails to build the facilities. There can be no assurance that the facilities will be built. In connection with licensing agreements entered into by the Company, in December 1996, the Company entered into indemnity agreements with a contractor which may result in a contingent liability of up to $4,500,000 on or after June 2, 1998. The Company entered into a letter of intent with Innovative Technologies in July of 1995 to apply Covol's briquetting technology to certain metallic ores supplied by Innovative. The Company conducted numerous tests of the ore through the fall of 1995, and concluded from the results that the venture was not economically viable. Accordingly, final agreement to process the ore was never reached. Innovative filed suit in March 1997, alleging that Covol breached its letter of intent with Innovative. On March 4, 1997, Innovative Holding Company, Inc., a California corporation, and ORO Limited, a California limited partnership, filed a civil complaint against the Company alleging breach of the letter of intent in the amount of $500,000 plus damages. The Company believes the case is without merit and will vigorously defend the suit. On February 1, 1996, the Company entered into a Stock Purchase Agreement (the "Agreement") with former principals of IME, State, CIC and Larson to sell all of the common shares of the subsidiaries to the Buyers for a $5,000,000 face value 6% promissory note (the "Note"). The Buyers have raised various contentions regarding the Note and the Agreement. The Note is collateralized by 100,000 shares of the Company's common stock owned by the Buyers and held by the Company, 100,000 shares of the Company's common stock committed by the Buyers to be provided to the Company, and personal guarantees of the Buyers. The Buyers claim that Covol is responsible to pay additional amounts beyond the $3,500,000 provided for in the agreement. Furthermore, the Buyers claim that the Company represented to them payment terms that are different from the original promissory note. The Company accrued as of September 30, 1996 approximately $650,000 of additional expenses related to the discontinued operations for the wind-down period which were paid or accrued by the subsidiaries. The Company is investigating the claims made by the Buyers and the Company anticipates that an amicable settlement can be reached. However, there can be no assurance that a settlement will be reached with the Buyers. In connection with the engagement of RAS Securities Corp. as placement agent and as settlement of a dispute regarding the Letter Agreement, the Company entered into a Settlement Agreement, dated as of January 27, 1997, with RAS and certain principals of RAS whereby the Company agreed to issue approximately 26,300 shares of Company common stock to the Individuals in settlement of certain alleged rights under a Letter Agreement, dated as of April 5, 1996, by and among RAS and the Company. Under the disputed Letter Agreement, RAS exercised certain warrants to purchase 65,000 shares of Company common stock. In accordance with the RAS Settlement Agreement, the parties are mutually released from their respective rights and obligations, if any, under the Letter Agreement. 7 COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) ---------------------------------------- Contingencies, continued On June 5, 1997 Brandt Filtration Group, Inc. filed a complaint against the Company in the State Court for Gwinnett County, State of Georgia. The plaintiff also named Pacific Power & Light Company ("Pacific") as a defendant. The plaintiff prayed for $160,340 plus other unspecified damages and legal expenses. The complaint alleges that the Company breached a contract to purchase air filtration equipment for the Alabama project from Brandt and further alleges that the Company acted as agent for Pacific. Pacific removed the action to the United States District Court for the Northern District of Georgia. The Company and Pacific have answered the complaint, denying any agency liability on the part of Pacific. Pacific has filed a motion seeking to have the action dismissed against it. The Company disputes the amounts claimed by the plaintiff and intends to defend the action if a suitable settlement cannot be reached. On June 26, 1997 Kirby Cochran, former President of the Company during the period from September of 1995 through May of 1996, filed a complaint against the Company in the Fourth Judicial District for Utah County, State of Utah. The plaintiff also named unspecified John Does 1-5 as defendants. The complaint alleges that Mr. Cochran is entitled to a declaratory judgment awarding him options to purchase 600,000 shares of the Company's stock plus damages of $50,000 as repayment of a purported loan. The complaint further alleges claims of conversion, fraud, and breach of contract related to the stock options and loan. Finally, the complaint alleges a claim for punitive damages and other unspecified special or general damages. The Company has filed a petition to remove the action to the United States District Court for the District of Utah. The Company has answered the complaint, denying liability and intends to vigorously defend the action. Further, the Company intends to file counterclaims against Mr. Cochran. 8. Other Matters In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share. This statement establishes standards for computing and presenting earnings per share ("EPS") and makes them comparable to international EPS standards. This statement is effective for financial statements for both interim and annual periods ending after December 15, 1997. The Company is currently evaluating the impact of the recently issued statement and will adopt the requirements for the year ending September 30, 1998. The Company has reviewed other recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on the results of operations or financial position of the Company. Based on that review, the Company believes that none of these pronouncements will have a significant effect on current or future earnings or operations. 8 COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES --------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Results of Operations Three months ended June 30, 1997 compared to three months ended June 30, 1996 Revenues For the quarter ended June 30, 1997, total revenues were increased by $96,681 to $130,112 compared to $33,431 in the comparable period in 1996. Binder sales were $130,112 for the quarter ended June 30, 1997 compared to no binder sales for the same period ended June 30, 1996. Synthetic fuel sales decrease to $0 for the quarter ended June 30, 1997 from $33,431 for the same period in 1996. The increase in binder sales is attributable to an increase in production at the Utah plant, while the decrease in synthetic fuel sales is a result of the stockpiling of synthetic fuel product pending the refining and marketing of the synthetic fuel product. Margins, Costs and Expenses The Company's operating loss decreased by $1,663,863 to $1,780,333 for the quarter ended June 30, 1997 from a loss of $3,444,196 reported for the same period June 30, 1996 due principally to: a decrease of research and development expense of $327,194 from $420,050 for the quarter ended June 30, 1996 to $92,856 for the same period ended June 30, 1997; a decrease of selling, general and administrative from $1,368,951 for the quarter ended June 30, 1996 to $672,780 for the quarter ended June 30, 1997 ; a decrease of compensation expense on stock options from $1,425,929 for the quarter ended June 30, 1996 to $384,414 for the quarter ended June 30, 1997. Expense on issuance of common stock increased to $342,805 for the quarter ended June 30, 1997 compared to $4,500 for the same period ended June 30, 1996. Cost of briquetting operations increased $132,027 to $390,224 for the quarter ended June 30, 1997 from $258,197 for the quarter ended June 30, 1996. Minority interest in income of consolidated subsidiaries increased to $27,366 for the quarter ended June 30, 1997 compared to $0 for the same quarter ended June 30, 1996. Compensation expense on stock options for the quarter ended June 30, 1996 of $1,425,929 is based on the related financial statement for that period filed in the Company's Form 10-Q/A, Amendment No. 1 for the period ended June 30, 1996. Net Loss For the quarter ended June 30, 1997, the Company had a decrease in net loss of $4,136,205 to $1,471,015 as compared to a net loss of $5,607,220 for the comparable period in 1996. Other income increased $2,472,342 to $309,318 income for the quarter ended June 30, 1997 compared to a $2,163,024 loss for the same quarter ended June 30, 1996 principally due to: a decrease of write-down of note receivable to $100,000 for the quarter ended June 30, 1997 from a write-down of $2,250,000 for the same quarter ended June 30, 1996; interest income increased by $100,965 to $189,559 for the period ended June 30, 1997 from $88,594 for the same period ended June 30, 1996; and, gain on sale of assets increased to $299,822 for the quarter ended June 30, 1997 from $0 for the same quarter ended June 30, 1996. Interest expense increased to $95,501 for the quarter ended June 30, 1997 from $1,558 for the same quarter ended June 30, 1996. 9 COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES --------------------------------------- Results of Operations Nine months ended June 30, 1997 compared to nine months ended June 30, 1996 Revenues For the nine months ended June 30, 1997, total revenues were increased by $1,538,798 to $1,575,970 compared to $37,172 in the comparable period in 1996. A one-time license fee of $1,400,000 was the primary reason for the increased revenue. Binder sales were $134,129 for the nine months ended June 30, 1997 compared to no binder sales for the same period ended June 30, 1996. Synthetic fuel sales increased to $124,341 with a return on synthetic fuels of $82,500 for the period ended June 30, 1997 from a total of $37,172 for synthetic fuels sales for the same period ended June 30, 1996. The license fee revenue was earned in connection with the sale of the Utah Project. The Company anticipates that it will continue to earn license fees from the Utah Project and from the sale and operation of similar plants. Margins, Costs and Expenses The Company's operating loss decreased to $3,224,591 for the nine months ended June 30, 1997 from a loss of $9,026,614 reported for the same period June 30, 1996 due principally to: a decrease of research and development expense of $681,982 from $945,301 for the nine months ended June 30, 1996 to $263,319 for the same period ended June 30, 1997; a decrease of selling, general and administrative from $3,040,541 to $1,902,617 for the nine months ended June 30, 1997; a decrease of compensation expense on stock options from $4,315,798 for the nine months ended June 30, 1996 to $933,112 for the nine months ended June 30, 1997. Expense on issuance of common stock increased to $383,305 for the nine months ended June 30, 1997 compared to $73,623 for the same period ended June 30, 1996. Cost of briquetting operations increased by $451,393 from $688,523 for the nine months ended June 30, 1996 to $1,139,916 for the nine months ended June 30, 1997. Minority interest in income of consolidated subsidiaries increased to $178,292 for the nine months ended June 30, 1997 compared to $0 for the same nine months ended June 30, 1996. Compensation expense on stock options for the nine months ended June 30, 1996 of $4,315,798 is based on the restated financial statements for that period filed in the Company's Form 10-Q/A, Amendment No. 1 for the period ended June 30, 1996. Net Loss For the nine months ended June 30, 1997, the Company has a net loss of $2,911,326 as compared to a net loss of $12,370,608 for the comparable period in 1996. Other income increased to $313,265 for the nine months ended June 30, 1997 from a loss of $2,439,489 for the same nine months ended June 30, 1996 principally due to: a decrease of write-down of note receivable to $150,000 for the nine months ended June 30, 1997 from a write-down of $2,449,575 for the same nine months ended June 30, 1996; interest income increased $249,196 to $449,146 for the nine months ended June 30, 1997 from $199,950 for the same period ended June 30, 1996; and, gain on sale of assets increased to $295,626 for the nine months ended June 30, 1997 from $0 for the same nine months ended June 30, 1996. Interest expense increased to $301,398 for the nine months ended June 30, 1997 from $45,606 for the nine months ended June 30, 1996. Liquidity and Capital Resources The Company continues to make progress toward the commercialization of its technology and movement towards becoming an operating company with less emphasis on development. Cash used by the Company in operating activities decreased $1,134,037 during the nine months ending June 30, 1997 ($2,773,414 compared to $3,907,451 for the same period in 1996) principally due to an increase of revenues and a decrease in research and development expense, selling, general and administrative expense and compensation expense on stock options. 10 COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES --------------------------------------- The Company increased its investment in property, plant and equipment from $2,569,530 for the nine months ended June 30, 1996 to $6,580,171 for the nine months ended June 30, 1997 due principally to the development of the Utah Project and the Alabama Project. The Company was able to fund these capital expenditures principally through the issuance of notes payable and the issuance of common stock. In connection with construction agreements entered into by the Company in December 1996, in order to assure the agreements would be considered binding on the Company, the Company agreed to penalty clauses in the aggregate amount of $3,012,000 if they failed to build the facilities. There can be no assurance that the facilities will be built. In connection with licensing agreements entered into by the Company, in December 1996, the Company entered into indemnity agreements with a contractor which may result in a contingent liability of up to $4,500,000 on or after June 2, 1998. For a more detailed description of the construction and licensing agreements, see the Company's Form 10-K for fiscal year ended September 30, 1996. During the quarter ended March 31, 1997, the Company entered into contractual arrangements to acquire coal fines and to conduct recovery and preparation activities. The total obligation to acquire the coal fines is approximately $5,500,000 of which $750,000 has been paid with the balance due over 3 years. $395,833 of such obligation is due in fiscal year 1997. On January 27, 1997, the Company engaged RAS Securities Corp., to act as placement agent on a "best efforts" private offering of a minimum aggregate principal amount of $1,000,000 ($3,000,000 maximum) of 8% Convertible Subordinated Debentures of the Company to accredited investors. This offering was terminated by the Company on March 27, 1997 without the placement of any debentures. In connection with the engagement of RAS Securities Corp. ("RAS") as placement agent and as settlement of a dispute regarding the Letter Agreement (defined below), the Company entered into a Settlement Agreement, dated as of January 27, 1997 (the "RAS Settlement Agreement"), with RAS and certain principals of RAS (the "Individuals") whereby the Company agreed to issue approximately 40,330 shares of Company common stock to the Individuals in settlement of certain alleged rights under a Letter Agreement, dated as of April 5, 1996 (the "Letter Agreement"), by and among RAS and the Company. Under the disputed Letter Agreement, RAS exercised certain warrants to purchase 65,000 shares of Company common stock. In accordance with the RAS Settlement Agreement, the parties are mutually released from their respective rights and obligations, if any, under the Letter Agreement. At June 30, 1997, the Company had a working capital deficit of $2,942,262. The Company is currently in discussions with various sources for equity financing. The Company believes that the resources described above and the potential equity financing will be adequate for the Company to meet its obligations in fiscal year 1997 notwithstanding its working capital deficit at June 30, 1997. However, there is no assurance that the Company will be able to obtain the necessary equity financing. On March 20, 1997, the Company entered into a Convertible Loan and Security Agreement (the "Loan Agreement") with PacifiCorp Financial Services, Inc., an Oregon corporation ("PacifiCorp"). Under the Loan Agreement the Company may borrow up to $5,000,000 as evidenced by a draw down promissory note (the "Promissory Note") payable to PacifiCorp. As of June 30, 1997, the Company has drawn $1,696,222 under the Loan Agreement. Principal and accrued interest on the Promissory Note is due and payable on March 20, 1998 (the "Due Date"), unless the Promissory Note is converted into Company common stock. Interest due on the Promissory Note is calculated based on a 360 day year and the actual number of days lapsed, and will be compounded monthly. The interest rate is a rate per annum equal to the lesser of (i) the highest rate allowed by law, or (ii) the sum of the rate of interest publicly announced by Morgan Guaranty Trust Company of New York in New York City from time to time plus two percent (2%) per annum. 11 COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES --------------------------------------- The proceeds of the loan (the "Loan") may be used by the Company to (i) complete construction of the coal briquetting facility to be located in Birmingham, Alabama (the "Alabama Project"), (ii) finance the purchase of coal fines for the Alabama Project, (iii) fund the net working capital needs of the Alabama Project, (iv) finance the development and construction of a wash plant for coal fines, and (v) other uses related to the Alabama Project approved by PacifiCorp in its sole discretion. The Company's obligation to repay the Loan is secured by a security interest and lien on certain property relating to the Alabama Plant. In addition, PacifiCorp has the right to convert all or a portion of the principal and unpaid interest on the Loan at any time into shares of Company common stock at a conversion price of $7.00 per share, subject to certain adjustments as provided in the Loan Agreement. On May 5, 1997, PacifiCorp filed a Schedule 13D with the Securities and Exchange Commission reporting its beneficial ownership of 714,286 shares of Company common stock should PacifiCorp convert the full amount of the Loan. Pursuant to the Registration Rights Agreement, dated as of March 20, 1997, between the Company and PacifiCorp, PacifiCorp has been granted certain "demand" and "piggy-back" registration rights with respect to shares of Company common stock that could be acquired by PacifiCorp pursuant to the Loan Agreement. Pursuant to the Alabama Project Purchase Agreement, dated as of March 20, 1997 (the "Purchase Agreement"), by and between the Company, Alabama Synfuel #1, Ltd., a Delaware limited partnership ("Alabama Synfuel") and Birmingham Syn Fuel, L.L.C., an Oregon limited liability company ("Birmingham Syn Fuel"), the Company and Alabama Synfuel have agreed to sell, and Birmingham Syn Fuel has agreed to buy, the Alabama Project, subject to the terms and conditions of the Purchase Agreement. The purchase price for the Alabama Project would be $3,400,000 and would be payable in the form of a nonrecourse promissory note secured by certain property of the Alabama Project. There are numerous conditions to the closing of the sale of the Alabama Project, including, but not limited to, the receipt of an Internal Revenue Service Private Letter Ruling (the "Letter Ruling"). In connection with the Loan from PacifiCorp described above and the pending sale of the Alabama Project, Birmingham Syn Fuel I, Inc., and Birmingham Syn Fuel II, Inc. (collectively, the "PFS Parties"), PacifiCorp, Alabama Synfuel and the Company entered into the Conditional Option Agreement, dated as of March 20, 1997 (the "Conditional Option Agreement"). Under the Conditional Option Agreement, the Company granted to the PFS Parties and to PacifiCorp a put option to require the Company to simultaneously purchase all of the rights, title and interest of the PFS Parties in Birmingham Syn Fuel and all of the interest of PacifiCorp in the Loan and in the other Transactional Documents (as that term is defined in the Purchase Agreement) excluding shares obtained in conversion of the Loan if (i) the Alabama Project is not completed consistent with Birmingham Syn Fuel's approved plans and specifications and placed in service (within the meaning of Section 29 of the Internal Revenue Code of 1996) by June 30, 1997, (ii) a Letter Ruling (as defined above) is not received by June 30, 1997 which is satisfactory to Birmingham Syn Fuel or (iii) if, at any time, there has occurred and is continuing an "Event of Default" under the Loan Agreement (each being referred to herein as a "Put Event"). In no event, however, shall a Put Event occur after receipt of a satisfactory Letter Ruling by Birmingham Syn Fuel. In December 1996, the Company entered into a Debenture Agreement and Security Agreement with AJG Financial Services, Inc. to borrow $4,000,000. In December 1996, $1,100,000 in convertible subordinated debentures (the "Subordinated Debentures") were issued and funded, with an additional $2,900,000 in credit available for future draw downs pursuant to Senior Debentures (non-convertible) to be issued by the Company. During the quarter ended March 31, 1997 the Company drew down $2,792,173 and on April 14, 1997 the Company drew down the remaining $107,827 of the available $2,900,000. On May 5, 1997 the $1,100,000 convertible subordinated debentures and accrued interest were converted into 140,642 shares of common stock based on a conversion price of $8.00 per share. In July, 1996, the Company borrowed $700,000 from Key Bank. The loan was personally guaranteed by seven officers, directors and employees of the Company. The current outstanding balance on the loan, including interest and fees is $523,940. The Company and Key Bank have previously negotiated rollovers of the loan. The current rollover matured May 30, 1997. Key Bank has notified the Company that it is in default on the loan. The Company is arranging with Key Bank to pay off the loan. 12 COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES --------------------------------------- The Company anticipates that cash flow from (i) the sale of certain coal facilities, (ii) fees for the operation of facilities owned by third parties, (iii) licensing and royalty fees from new plants utilizing the briquetting technology, (iv) the sale of chemical binder to new plants utilizing the briquetting technology, (v) sale of synthetic fuel product, (vi) fees from port operations and loading, (vii) cash distributions from its partnership interests and (viii) collections on notes receivable will be used to fund working capital and other operating needs. Most of the cash flow from the above sources will not occur until late 1997 and in subsequent years. 13 COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES --------------------------------------- Forward Looking Statements Statements regarding the Company's expectations as to its liquidity, capital resources and certain other information presented in this Form 10-Q constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results will not differ materially from its expectations. In addition to matters affecting the economy and the Company's industry generally, factors which could cause actual results to differ from expectations include, but are not limited to, the following: (i) The commercial success of the Company's briquetting technology. (ii) Procurement of necessary equipment to place facilities into operation. (iii) Securing of necessary sites and raw materials for facilities to be constructed and operated. (iv) Timely construction and completion of facilities. (v) Ability to obtain needed additional capital on terms acceptable to the Company in order to finance the development of the briquetting technology and working capital needs. (vi) Changes in governmental regulation or failure to comply with existing regulation could result in operational shutdowns of its facilities. (vii) The ongoing availability of tax credits under Section 29 of the Internal Revenue Code. (viii) Ability to meet financial commitments under existing contractual arrangements. With respect to tax credits under Section 29 of the Internal Revenue Code of 1996, as amended ("Section 29"), on February 6, 1997, the Treasury Department released the General Explanations of the Administration's Revenue Proposals, which summarized the tax-related provisions from the President's Fiscal Year 1998 Budget submission to Congress (the "Proposed Federal Budget"). The initial version of the Proposed Federal Budget proposed an amendment to a provision of Section 29. Currently, Section 29 requires that facilities producing certain qualified fuels (including solid synthetic fuel produced from coal) that are constructed pursuant to a binding contract in place by December 31, 1996 be placed in service by June 30, 1998. (The "placed-in-service date" and "binding-contract date" have been previously extended on several occasions, most recently by the Small Business Jobs Protection Act of 1996.) The Proposed Federal Budget proposed that the placed-in-service date be changed to June 30, 1997. On August 5, 1997, President Clinton signed the Taxpayer Relief Act of 1997 (the "Act"). In addition to the broad implications of the Act which aims to eliminate the deficit by 2002 and provide the first general tax cut in 16 years, the Act did not include any modification to Section 29. Hence, the June 30, 1998 deadline for placing in service synthetic fuel plants constructed pursuant to binding contracts in place before January 1, 1997 remains intact. 14 COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES --------------------------------------- PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On June 5, 1997 Brandt Filtration Group, Inc. filed a complaint against the Company in the State Court for Gwinnett County, State of Georgia. The plaintiff also named Pacific Power & Light Company ("Pacific") as a defendant. The plaintiff seeks $160,340 plus other unspecified damages and legal expenses. The complaint alleges that the Company breached a contract to purchase air filtration equipment for the Alabama project from Brandt and further alleges that the Company acted as agent for Pacific. Pacific removed the action to the United States District Court for the Northern District of Georgia. The Company and Pacific have answered the complaint, denying any agency liability on the part of Pacific. Pacific has filed a motion seeking to have the action dismissed against it. The Company disputes the amounts claimed by the plaintiff and intends to defend the action if a suitable settlement cannot be reached. On June 26, 1997 Kirby Cochran, former President of the Company during the period from September of 1995 through May of 1996, filed a complaint against the Company in the Fourth Judicial District for Utah County, State of Utah. The plaintiff also named unspecified John Does 1-5 as defendants. The complaint alleges that Mr. Cochran is entitled to a declaratory judgment awarding him options to purchase 600,000 shares of the Company's stock plus damages of $50,000 as repayment of a purported loan. The complaint further alleges claims of conversion, fraud, and breach of contract related to the stock options and loan. Finally, the complaint alleges a claim for punitive damages and other unspecified special or general damages. The Company has filed a petition to remove the action to the United States District Court for the District of Utah. The Company has answered the complaint, denying liability and intends to vigorously defend the action. Further, the Company intends to file counterclaims against Mr. Cochran. ITEM 2. CHANGES IN SECURITIES. Recent Sales of Unregistered Securities The following sets forth securities issued by the Company within the past fiscal quarter without registering the securities under the Securities Act of 1933, as amended (the "33 Act"). No underwriters were involved in any stock issuances nor were any commissions or similar fees paid in connection therewith. The Company believes that the following issuances of shares of common stock, notes and debentures and other securities were exempt from the registration requirements of the 33 Act pursuant to the exemption set forth under Regulation S of the 33 Act or Section 4(2) thereof. On April 1, 1997, the Company granted 50,000 stock options to Max Sorensen, an executive of the Company, which was recorded as deferred compensation and valued at $312,500. The exercise price is $1.50 per share for 50,000 options. On April 1, 1997, the Company granted 2,500 stock options to Vern May, a director of the company as director compensation. The exercise price is $1.50 per share. On April 15, 1997, the Company granted stock options to acquire 180,000 shares, at an exercise price of $8.25 per share, to 9 employees of the Company. On May 1, 1997, the Company granted 2,500 stock options to Joe Johnson, a director of the Company, as director compensation. The exercise price is $1.50 per share. On May 6, 1997, the Company issued 49,996 shares of common stock in a private placement to three accredited investors for $299,976. 15 COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES --------------------------------------- As described in Part I, Item 2 above, on May 5, 1997 the Company issued 140,642 shares of common stock to AJG Financial Services, Inc., an accredited investor converting the subordinated debenture and accrued interest at a price of $8.00. On May 19, 1997, the Company issued 50,000 shares of common stock to two accredited investors for $90,000 in exercising of options at $1.80 per share. On June 6, 1997, the Company issued 40,330 shares to certain principals of RAS Securities Corp. each accredited investors valued at $8.50 per share in settlement totaling $342,765. Regulation S Offering. On May 26, 1997 and July 7, 1997, and in reliance on Regulation S of the Securities Act of 1933, as amended ("Regulation S"), the Company received funds and accepted subscriptions for the sale of 224,000 units and 60,000 units, respectively (the "Units"), from accredited non-U.S. persons (the "Non-U.S. Persons"). Each Unit consisted of (i) one share of Company common stock, $0.001 par value per share (the "Common Stock"), and (ii) a warrant to acquire one share of Company Common Stock at a price of $7.25 per share (the "Warrants"), for a total purchase price per Unit of $6.00, or a total of $1,704,000. The Warrants are exercisable at any time prior to the second anniversary of their issuance. The Shares of Company Common Stock issuable under the Warrants and the Finder Warrants (as defined below) have piggy-back registration rights and conditional demand registration rights. The conditional demand registration rights are triggered if within twelve (12) months from the date of subscription, the Securities and Exchange Commission imposes an additional holding period requirement on securities issued under Regulation S, other than the holding period restrictions currently in effect. Doyle Capital Resources, an Australian entity located at Level 32, Chifley Tower, Two Chifley Square, Sydney NSW 2000 Australia ("Doyle Capital Resources"), and Aymkone Pty Ltd, an Australian entity located at Level 4, 70 Castlereagh Street, Sydney NSW 2000 Australia ("Aymkone"), acted as finders in the sale to the Non-U.S. Persons. As compensation for acting as finders on both subscriptions, Doyle Capital Resources received a cash fee of five percent of the proceeds of such offerings and Aymkone received warrants (the "Finder Warrants") to purchase 71,000 shares of Company Common Stock at a price of $7.25 per share. The Finder Warrants are exercisable at any time prior to the second anniversary of their issuance. Based upon representations made to the Company, Aymkone is also a non-U.S. person and the Finder Warrants were issued in reliance on Regulation S. ITEM 3. DEFAULTS OF SENIOR SECURITIES. In July, 1996, the Company borrowed $700,000 from Key Bank. The loan was personally guaranteed by seven officers, directors and employees of the Company. The current outstanding balance on the loan, including interest and fees is $523,940. The Company and Key Bank have previously negotiated rollovers of the loan. The current rollover matured May 30, 1997. Key Bank has notified the Company that it is in default of the loan. The Company is arranging with Key Bank to pay off the loan. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On June 25, 1997, the Company held its annual stockholders meeting in Salt Lake City, Utah (the "Annual Meeting"). At the Annual Meeting the stockholders approved of : (i) the election of Raymond J. Weller, Brent M. Cook, Stanley M. Kimball, DeLance M. Squire, Vern T. May and Joe K. Johnson as directors; (ii) an amendment to the Company's Certificate of Incorporation to create a new class of preferred stock, $.001 par value, with an authorized number of shares equal to 10,000,000; (iii) an amendment to the Company's Bylaws to provide for (a) classified board of directors, (b) the minimum and maximum number of directors on the Board, (c) the removal of directors with the vote or written consent of stockholders representing not less than two-thirds of the issued and outstanding stock entitled to vote and (d) increases to the size of the board of directors with the vote or written consent of the stockholders representing not less than two-thirds of the issued and outstanding stock entitled to vote; and (iv) the ratification of Coopers & Lybrand LLP as independent auditors of the Company for fiscal year ending September 30, 1997. 16 COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES --------------------------------------- The following list summarizes the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes, as to each matter, including a separate tabulation for each nominee to the board of directors. Abstentions ITEM (I) - Election of Directors Votes For Votes Withheld Broker Non-Votes --------- -------------- ---------------- Raymond J. Weller 5,947,402 265,770 18,927 Brent M. Cook 6,016,399 192,795 22,905 Stanley M. Kimball 5,936,177 201,295 94,627 DeLance M. Squire 6,011,732 202,970 17,397 Vern T. May 6,012,736 200,436 18,927 Joe K. Johnson 6,035,663 196,436 0 ITEM (II) - Amendment to Certificate of Incorporation 4,182,952 442,787 116,735 ITEM (III) - Amendment to Bylaws (a) Classification of Board 4,430,325 231,311 72,048 (b) Number of Directors 5,962,561 132,566 86,383 (c) Removal of Directors 4,216,466 431,398 93,389 (d) Increase size of Board 4,536,750 117,430 71,089 ITEM (IV) - Ratification of 6,079,847 16,160 52,877 Independent Auditors ITEM 5. OTHER INFORMATION In 1995, the Company made a strategic decision to focus its efforts exclusively on commercializing the Briquetting Technology and to divest itself of its construction and limestone subsidiaries ("Subsidiaries"). On February 1, 1996, the Company entered into a Stock Purchase Agreement (the Agreement) with former principals of IME, State, CIC and Larson (Buyers) to sell all of the common shares of the subsidiaries to the Buyers for a $5,000,000 face value 6% promissory note (the Note). See Item 1 of the Company's Annual Report on Form 10-K for the year ended September 30, 1996 for a detailed discussion of the terms of the sale. The Buyers have raised various contentions regarding the Note and the Agreement. The Buyers claim that Covol is responsible to pay additional amounts beyond the $3,500,000 provided for in the agreement. Furthermore, the Buyers claim that the Company represented to them payment terms that are different from the original promissory note. The Company accrued as of September 30, 1996 approximately $650,000 of additional expenses related to the discontinued operations for the wind-down period which were paid or accrued by the subsidiaries. The Company is investigating the claims made by the Buyers and anticipates that an amicable settlement can be reached. However, there can be no assurance that a settlement will be reached with the Buyers. The results of the construction and limestone operations have been classified as discontinued operations for all periods presented in the Consolidated Statements of Operations. The assets and liabilities of the discontinued operations have been classified in the Consolidated Balance Sheets as "Net assets - discontinued operations." Discontinued operations have also been segregated for all periods presented in the Consolidated Statements of Cash Flows. Effective July 17, 1997, Joe K. Johnson resigned from the Board of Directors to pursue other business interests and to allow the Company flexibility to appoint another director in connection with future financing transactions. 17 COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES --------------------------------------- PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Those exhibits previously filed with the Securities and Exchange Commission as required by Item 601 of Regulation S-K, are incorporated herein by reference in accordance with the provisions of Rule 12b-32. 3.1.2 Certificate of Amendment of the Certificate of Incorporation dated June 25, 1997. 3.2.1 Certificate of Amendment of the Bylaws dated May 20, 1997. 3.2.2 Certificate of Amendment of the Bylaws dated June 25, 1997. 27.1 Financial Data Schedule. (b) The Company filed two Current Reports on Form 8-K dated May 26, 1997 and July 7, 1997, respectively. The information provided therein disclosed the sale of Company common stock and warrants pursuant to Regulation S of the Securities Act of 1933, as amended. 18 COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES --------------------------------------- SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 14, 1997 COVOL TECHNOLOGIES, INC. By: /s/ Brent M. Cook ------------------------------------------------- Brent M. Cook, Chief Executive Officer and President By: /s/ Stanley M. Kimball ------------------------------------------------- Stanley M. Kimball, Principal Financial Officer 19 EX-3.1.2 2 ARTICLES OF INCORPORATION CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF COVOL TECHNOLOGIES, INC. Covol Technologies, Inc. (the "Company"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: 1. On May 20, 1997, the Board of Directors of the Company approved (i) an amendment to the Company's Certificate of Incorporation to create a new class of preferred stock, $.001 par value, with an authorized number of shares of 10,000,000 (the "Preferred stock"), and (ii) to submit such amendment to the stockholders for their approval at the next annual meeting. 2. On June 25, 1997, the Company held its annual stockholders meeting where stockholders approved of the proposal to amend the Company's Certificate of Incorporation to create the Preferred stock (the "Stockholder Approval"). 3. Effective as of the date hereof, and after giving effect to the Board of Director's Stockholders' approval, Article V of the Certificate of Incorporation shall be amended to provide as follows: ARTICLE V A. The capital stock authorized, the par value thereof, and the characteristics of such stock shall be as follows: ================================================================================ Number of Shares Par Value Class of Authorized Per Share Stock - -------------------------------------------------------------------------------- 25,000,000 $.001 Common - -------------------------------------------------------------------------------- 10,000,000 $.001 Preferred ================================================================================ B. The Board of Directors of the Company is authorized, from time to time, to establish series of unissued shares of Preferred stock, to designate each series, and to issue shares of any series then or previously designated; and to fix and determine separately for each series any one or more of the following relative rights and preferences: (a) The rate of dividend payable with respect to shares of each series and the dates, terms and other conditions on which such dividends shall be payable; (b) The nature of the dividend payable with respect to shares of such series as cumulative, non-cumulative or partially cumulative. (c) The price at and the terms and conditions on which shares may be redeemed (if applicable); (d) The amount payable to holders of such series in the event of involuntary liquidation of the Company; (e) The amount payable to holders of such series in the event of voluntary liquidation of the Company; (f) The sinking fund provisions (if any) for the redemption or purchase of shares; (g) The terms and conditions on which shares may be converted, if the shares of any series are issued with the privilege of conversion; (h) The voting rights (if any); and (i) The repurchase obligations of the Company with respect to the shares of each series (if any). C. The Board of Directors may increase or decrease the number of authorized shares within each series, whether or not any shares of the series are outstanding; provided, however, that the Board of Directors may not decrease the number of shares within a series below the number of shares within such series that is then issued. The approval of existing Preferred stock or Common stock stockholders shall not be required. D. Dividends on the Preferred stock when and if declared by the Board of Directors out of any funds legally available therefor may be cumulative or non-cumulative, as determined by the Board of Directors. The Preferred stock as a class shall have a preference over the Common stock as a class as to the payment of such dividends. The relative preference between series of Preferred stock as to the payment of such dividends may be fixed and determined by the Board of Directors. E. In the event of voluntary or involuntary liquidation of the Company, the Preferred stock shall have a preference in the assets of the Company over the Common stock, as fixed and determined by the Board of Directors. The relative preference between series of Preferred stock may be fixed and determined by its Board of Directors. 4. That the foregoing amendment to the Certificate of Incorporation has been duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. 2 EX-3.2.1 3 BY-LAWS CERTIFICATE OF AMENDMENT TO BYLAWS OF COVOL TECHNOLOGIES, INC. Pursuant to Unanimous Consent of the Board of Directors effective May 20, 1997, Article 2, Section 8, of the Bylaws of Covol Technologies, Inc. is amended to read in its entirety, as follows: Section 8. Required Vote. The vote of the holders of a majority of the shares entitled to vote and represented at a meeting at which a quorum is present shall be the act of the Corporation's stockholders unless the question is one upon which by express provision of the statutes or the Certificate of Incorporation a different vote is required, in which case such provision shall govern and control the decision of such question. The vote required for the election of the Directors shall be by plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. EX-3.2.2 4 BY-LAWS CERTIFICATE OF AMENDMENT TO BYLAWS OF COVOL TECHNOLOGIES, INC. Pursuant to Unanimous Consent of the Board of Directors effective May 20, 1997, and the action of the stockholders at the annual meeting of the stockholders held June 25, 1997, Article 3, Section 1, of the Bylaws of Covol Technologies, Inc. is amended to read in its entirety, as follows: Section 1. Number, Qualification, Election and Term. The number of directors of the Corporation shall be fixed from time to time, within the limits specified by the Certificate of Incorporation, by resolution of the Board of Directors; provided, however, no director's term shall be shortened by reason of a resolution reducing the number of directors. Directors need not be residents of the State of Delaware, stockholders of the Corporation or citizens of the United States. Unless provided otherwise by law, any director may be removed at any time, with or without cause, at a special meeting of the stockholders for that purpose. Members of the initial Board of Directors shall hold office until the first annual meeting of stockholders and until their successors shall have been elected and qualified. Following the first annual meeting of stockholders, the Board of Directors may be divided into three classes, Class I, Class II and Class III, each class to be as nearly equal in number as possible, the term of office of directors of the first class to expire at the first annual meeting of stockholders after their election, that of the second class to expire at the second annual meeting after their election, and that of the third class to expire at the third annual meeting after their election. At each annual meeting following such classification and division of the members of the Board of Directors, a number of directors equal to the number of directorships in the class whose term expires at the time of such meeting shall be elected to hold office until the third succeeding annual meeting of stockholders of the Corporation. Irrespective of Article 3, Section 2, any director of any class elected to fill a vacancy resulting from an increase in such class hold office for a term that shall coincide with the remaining term of the class. Each Director shall hold office for the class term for which he is elected and until his successor shall be elected and qualified. Notwithstanding anything herein to the contrary, any director may be removed from office at any time by the vote or written consent of stockholders representing not less than two-thirds of the issued and outstanding stock entitled to vote. The Board of directors shall have no less than five members and no more than nine members. Notwithstanding anything herein to the contrary, the size of the Board of Directors may not be increased without the vote or written consent of stockholder representing not less than two-thirds of the issued and outstanding stock entitled to vote. EX-27 5 FDS --
5 9-MOS SEP-30-1997 JUN-30-1997 401,867 0 390,027 0 1,739,204 3,670,140 10,024,967 579,065 17,773,005 6,612,402 0 0 0 8,470 2,114,465 17,773,005 1,575,970 1,575,970 1,139,916 4,800,561 313,265 0 449,146 (2,911,326) 0 (2,911,326) 0 0 0 (2,911,326) (.34) (.37)
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