-----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, I32xgZRpl3vNr5sDlyLjIlQNXgn465aybbUGGEgdMRwX0xqvcuBeNAwM6AO3otJU XtDa5K/id5bYrcrED2vouA== 0000737955-99-000021.txt : 19990816 0000737955-99-000021.hdr.sgml : 19990816 ACCESSION NUMBER: 0000737955-99-000021 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SGI INTERNATIONAL CENTRAL INDEX KEY: 0000737955 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING SERVICES [8711] IRS NUMBER: 330119035 STATE OF INCORPORATION: UT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-16675 FILM NUMBER: 99688872 BUSINESS ADDRESS: STREET 1: 1200 PROSPECT ST STE 325 CITY: LA JOLLA STATE: CA ZIP: 92037 BUSINESS PHONE: 6195511090 MAIL ADDRESS: STREET 1: 1200 PROSPECT STREET STE 325 CITY: LA JOLLA STATE: CA ZIP: 92037 FORMER COMPANY: FORMER CONFORMED NAME: VISION DEVELOPMENT INC DATE OF NAME CHANGE: 19850807 10QSB 1 QUARTERLY FINANCIAL STATEMENT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB (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, 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 2-93124 SGI International (Exact name of small business issuer as specified in its charter) Utah 33-0119035 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1200 Prospect Street, Suite 325, La Jolla, California 92037 (Address of principal executive offices) (858) 551-1090 (Issuer's telephone number) (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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. [X] Yes [ ] No The number of shares of common stock, no par value, outstanding as of August 10, 1999, was 42,722,981. Transitional Small Business Disclosure Format (Check one): [ ] Yes [X] No TABLE OF CONTENTS FORM 10-QSB PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Operations 4 Condensed Consolidated Statement of Stockholders' Deficiency 5 Condensed Consolidated Statements of Cash Flows 6 Notes to Condensed Consolidated Financial Statements 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introductory Note 14 Results of Operations 14 Liquidity and Capital Resources 16 Year 2000 18 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 18 MARKET RISK PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 18 ITEM 2. CHANGES IN SECURITIES 19 ITEM 3. DEFAULTS UPON SENIOR DEBT SECURITIES 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20 ITEM 5. OTHER INFORMATION 21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21 PART III. SIGNATURES 22 2 SGI INTERNATIONAL AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, December 31, 1999 1998 (Unaudited) - ------------------------------------------------------------------------------------------------------------------------ ASSETS Current assets: Cash $ 343,809 $ 239,885 Restricted time deposit 402,500 402,500 Receivable from LFC Investees 203,479 78,479 Trade accounts receivable, less allowance for doubtful accounts of $79,460 538,322 229,759 Costs and estimated earnings in excess of billings on contracts 17,190 275,967 Inventories 63,121 64,371 Prepaid expenses and other current assets 68,019 83,283 - ------------------------------------------------------------------------------------------------------------------------ Total current assets 1,636,440 1,374,244 - ------------------------------------------------------------------------------------------------------------------------ LFC Process related assets: Royalty rights, net 1,099,875 1,257,000 LFC cogeneration project, net 263,211 315,853 Investment in LFC Investees 491,222 490,232 Notes receivable, net 150,000 150,000 Australia LFC project, net - 86,877 LFC Process Control, net 83,031 3,834 Other technological assets, net 31,938 27,250 - ------------------------------------------------------------------------------------------------------------------------ 2,119,277 2,331,046 Property and equipment, net of accumulated depreciation of $1,129,056 and $920,941 573,980 766,695 Goodwill, net of accumulated amortization of $168,687 and $144,721 311,557 335,523 - ------------------------------------------------------------------------------------------------------------------------ $ 4,641,254 $ 4,807,508 - ------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities: Accounts payable $ 743,637 $ 224,310 Borrowings on line-of-credit 400,000 400,000 Billings in excess of costs and estimated earnings on contracts 454,838 156,411 Current maturities of long-term notes payable 1,501,875 690,000 12% convertible debentures 3,414,898 3,494,880 Accrued salaries, benefits and related taxes 421,986 139,486 Payable to LFC Investees 305,172 180,172 Interest payable 174,751 161,991 Other accrued expenses 279,139 189,487 - ------------------------------------------------------------------------------------------------------------------------ Total current liabilities 7,696,296 5,636,737 Long-term notes payable, less current maturities 125,000 104,750 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities 7,821,296 5,741,487 - ------------------------------------------------------------------------------------------------------------------------ Commitments and contingencies Mandatorily redeemable preferred stock $.01 par value liquidation value of $377,960 plus accumulated dividends (Note 6) 376,549 1,449,348 Stockholders' deficiency: Convertible preferred stock 635 641 Common stock 48,543,265 45,688,545 Paid-in capital 7,268,813 8,258,140 Accumulated deficit (59,369,304) (56,330,653) - ------------------------------------------------------------------------------------------------------------------------ Total stockholders' deficiency (3,556,591) (2,383,327) - ------------------------------------------------------------------------------------------------------------------------ $ 4,641,254 $ 4,807,508 - ------------------------------------------------------------------------------------------------------------------------
See notes to condensed consolidated financial statements. 3 SGI INTERNATIONAL AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three months Six months ended June 30, ended June 30, - ------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------- Revenues: Net sales $ 767,976 $ 1,500,276 $1,451,484 $ 2,589,188 Other 13,157 14,691 30,889 27,338 - ------------------------------------------------------------------------------------------------------------------------------- 781,133 1,514,967 1,482,373 2,616,526 Expenses: Cost of sales 438,619 1,191,510 914,837 1,978,110 Engineering, research and consulting 525,962 258,946 808,687 506,176 Loss from investment in LFC Investees - 196,075 - 427,289 Selling, general and administrative 867,843 796,728 1,616,467 1,478,194 Legal and accounting 167,474 167,792 326,145 353,558 Depreciation and amortization 231,028 195,516 542,506 387,875 Interest 161,566 324,870 312,348 460,882 - ------------------------------------------------------------------------------------------------------------------------------- 2,392,492 3,131,437 4,520,990 5,592,084 - ------------------------------------------------------------------------------------------------------------------------------- Net loss $(1,611,359) $(1,616,470) $(3,038,617) $(2,975,558) Imputed preferred stock dividends and accretion on convertible and mandatorily redeemable preferred stock 36,382 - 36,382 1,312,519 - ------------------------------------------------------------------------------------------------------------------------------- Net loss applicable to common stock $(1,647,741) $(1,616,470) $(3,074,999) $(4,288,077) - ------------------------------------------------------------------------------------------------------------------------------- Net loss per common share - basic $ (0.05) $ (0.12) $ (0.10) $ (0.36) - ------------------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding 35,193,496 13,292,754 29,891,480 12,037,388 - -------------------------------------------------------------------------------------------------------------------------------
See notes to condensed consolidated financial statements. 4 SGI INTERNATIONAL AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY (Unaudited) Convertible Preferred Stock Common Stock ------------------ --------------------- Total Shares Amount Shares Amount Paid-In Accumulated Stockholders' Capital Deficit Deficiency - ------------------------------------------------------------------------------------------------------------------------------------ Balances at December 31, 1998 64,044 $ 641 21,568,344 $45,688,545 $ 8,258,140 $(56,330,653) $(2,383,327) Issuance of common stock for cash 5,667,584 645,500 645,500 Issuance of commom stock for convertible debentures 286,762 68,107 68,107 Issuance of common stock for mandatorily redeemable preferred stock 10,860,637 1,072,833 1,072,833 Issuance of commom stock for services 271,208 39,075 39,075 Conversion of preferred stock (606) (6) 2,492,204 1,029,205 (1,029,199) - Issuance of warrants to purchase common stock to non-employees 18,765 18,765 Accretion adjustment for mandatorily redeemable preferred stock, net of conversions (34) (34) Interest expense related to issuance of warrants 21,107 21,107 Net Loss (3,038,617) (3,038,617) - ------------------------------------------------------------------------------------------------------------------------------------ Balances at June 30, 1999 63,438 $ 635 41,146,739 $48,543,265 $7,268,813 $(59,369,304) $(3,556,591) - ------------------------------------------------------------------------------------------------------------------------------------
See notes to condensed consolidated financial statements. 5 SGI INTERNATIONAL AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six months ended June 30, 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- Operating activities: Net loss $(3,038,617) $(2,975,558) Adjustments to reconcile net loss to net cash used in operating activities: Equity in net loss of LFC Investees - 427,289 Depreciation and amortization 542,506 387,875 Common stock issued for interest, services, and other operating activities 39,075 128,180 Non-employee compensation expense on issuance of warrants 18,765 44,640 Imputed and accured interest on warrants issued to note holders 21,107 188,033 Changes in operating assets and liabilities: Receivable from LFC Investees - (42,514) Trade accounts receivable (49,786) (189,508) Inventories 1,250 520 Other current assets 15,264 161,770 Accounts payable 519,327 320,420 Billings in excess of costs and estimated earnings on contracts 298,427 (87,802) Accrued salaries, benefits and related taxes 282,500 (49,562) Interest payable 12,760 (142) Other accrued expenses 89,652 (102,007) - ----------------------------------------------------------------------------------------------------------------------- Net cash used in operating activities (1,247,770) (1,788,366) - ----------------------------------------------------------------------------------------------------------------------- Investing activities: LFC Process related assets: Additions to LFC Process controls and other technological assets (85,419) - Investment in LFC Investees (990) (441,000) Payable to LFC Investees - (100,000) Purchase of property and equipment (18,400) (264,892) Other assets (9,247) (3,817) - ----------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (114,056) (809,709) - ----------------------------------------------------------------------------------------------------------------------- Financing activities: Payments of notes payable (4,750) (4,750) Proceeds from issuance of debt 825,000 - Proceeds from issuance of common stock 645,500 159,800 Proceeds from issuance of preferred stock - 2,313,200 - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 1,465,750 2,468,250 - ----------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash 103,924 (129,825) Cash at beginning of period 239,885 429,232 - ----------------------------------------------------------------------------------------------------------------------- Cash at end of period $ 343,809 $ 299,407 - ----------------------------------------------------------------------------------------------------------------------- Supplemental disclosure of cash flow information: Interest paid $ 264,715 $ 229,372 Supplemental disclosure of non-cash activities: Common stock issued for services $ 39,075 $ 128,180 Conversion of preferred stock $1,029,205 $2,831,749 Common stock issued for convertible debentures $ 68,107 - Common stock issued for mandatorily redeemable preferred stock $1,072,833 - - -----------------------------------------------------------------------------------------------------------------------
See notes to condensed consolidated financial statements. 6 SGI INTERNATIONAL AND SUBSIDIARIES NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (1) BASIS OF PRESENTATION The accompanying condensed consolidated financial statements of SGI International (the "Company") for the three and six month periods ended June 30, 1999, and 1998, are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-QSB. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements reflect all adjustments, consisting of only normal recurring adjustments which, in the opinion of management, are necessary for a fair statement of the consolidated financial position as of June 30, 1999, and the consolidated results of operations and cash flows for the six months ended June 30, 1999, and 1998. The results of operations for the three and six month periods ended June 30, 1999, are not necessarily indicative of the results to be expected for the year ending December 31, 1999. For more complete financial information, these financial statements, and the notes thereto, should be read in conjunction with the consolidated audited financial statements for the year ended December 31, 1998, included in the Company's Form 10-K filed with the Securities and Exchange Commission. The accompanying consolidated financial statements are prepared on a going concern basis. The recovery of amounts invested in the Company's principal assets, the LFC Process and OCET Process assets, is dependent upon the Company's ability to adequately fund its on-going development operations including capital contributions to its new joint venture LFC Technologies, LLC ("LFC Tech") with MLFC Corporation ("MLFC"), a wholly owned subsidiary of Mitsubishi Corporation. Furthermore, the ability to successfully bring both the LFC Process and OCET Process technologies to commercialization will ultimately depend on the Company's ability to attract sufficient additional equity, debt or other third-party financing. Success in commercialization of the LFC Process and OCET Process is dependent in large part upon the ability to enter into satisfactory arrangements with other partners, financiers or customers and upon the ability of these third parties to perform their responsibilities. The resources required to profitably develop, construct and operate an LFC plant are likely to include hundreds of millions of dollars, and expertise in major plant development and operations. There can be no assurance that any licenses, joint venture agreements or other arrangements will be available on acceptable terms, if at all; that any revenue will be derived from such arrangements; or that, if revenue is generated, any of said arrangements will be profitable to the Company. If the Company is unsuccessful in its attempts to license the LFC Process or OCET Process, or if such third parties are unsuccessful in profitably developing and operating LFC plants, the planned business and operations of the Company will likely not succeed and the Company would not be able to recover the carrying value of the long-lived assets related to either the LFC Process or OCET Process. The Company had negative working capital of $6.1 million and an accumulated deficit of $59.4 million at June 30, 1999. These factors and the Company's recurring losses from continuing operations, among others, raise substantial doubt about the Company's ability to continue as a going concern. The Company is currently seeking additional financing through public or private sales of its securities to fund working capital requirements. 7 The Company will also seek funding through additional strategic partnerships, joint ventures or similar arrangements to commercialize the technologies. There can be no assurance that any collaborative financing arrangements through a joint venture, and/or with strategic partners, will be available when needed, or on terms acceptable to the Company. If adequate funds are not available, the Company may be required to curtail or terminate one or more of its operating activities. The Company is engaged in continuing negotiation to secure additional capital and financing, and while management believes funds can be raised, there is no assurance that their efforts will be successful. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. (2) ORGANIZATION AND BUSINESS The principal businesses of the Company are developing, commercializing, and licensing new energy technologies; and manufacturing automated assembly equipment. The Company has the following wholly-owned subsidiaries at June 30, 1999: Assembly & Manufacturing Systems, Inc. ("AMS"); OCET Corporation ("OCET"); and U.S. Clean Coal Refineries, Inc. ("USCCR") which is currently inoperative. AMS designs, manufactures and installs automated assembly equipment, and was acquired in October 1995. OCET was organized in February 1995 to research and develop the Opti-Crude Enhancement Technology, a process for further refining residual oil bottoms. USCCR was organized in October 1994, to market clean coal refinery project development programs. (3) FINANCING TRANSACTIONS During the three month period ended June 30, 1999, the Company extended the due dates on $750,000 of notes payable due June 27, 1999, to August 16, 1999. Additionally, the Company granted two warrants to purchase 200,000 shares of common stock, to the holder of five notes payable aggregating $500,000, for accrued interest through June 27, 1999, valued at $21,107. The warrants are exercisable one year from the date of grant. The exercise prices were not lower than the closing bid price on the grant date and expire on December 31, 2004. One warrant to purchase 150,000 shares of common stock may be exercised at $0.16 per share and another warrant to purchase 50,000 shares of common stock may be exercised at $0.18 per share. During the three month period ended June 30, 1999, the Company issued additional incentive stock options, at fair market value pursuant to its 1996 Omnibus Stock Plan. The incentive options are exercisable for a total of 685,000 shares of common stock at $0.125 per share, the closing bid price on the grant date, to employees of the Company. The options were granted in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities Act and Regulation D promulgated thereunder. The options are exercisable upon effective registration under the Securities Act of 1933 or the common shares underlying the options are issuable under an exemption from the registration requirements under the Securities Act. The options shall expire on April 1, 2004. On April 1, 1999, the Company as provided in related service or consulting agreements, granted twelve warrants to purchase an aggregate of 275,000 common shares, to five directors and seven consultants for services rendered. The warrants were issued pursuant to the exemptions provided by Section 4(2) of the Securities Act and Regulation D. Investment representations were obtained and legends were placed on the certificates. In connection therewith, the Company recorded compensation expense to non-employees of approximately $9,720. The exercise prices were not lower 8 than the closing bid price on the grant date and expire on December 31, 2004. The warrants are exercisable one year from the grant date at $0.125 per share. On April 8, 1999 the Company as provided in a related consulting agreement, granted one warrant to purchase an aggregate of 48,000 common shares, to one consultant for services rendered. The warrants were issued pursuant to the exemptions provided by Section 4(2) of the Securities Act and Regulation D. investment representations were obtained and legends were placed on the certificate. In connection therewith, the Company recorded compensation expense of approximately $2,160. The exercise price was not lower than the closing bid price on the grant date and expires on December 31, 2004. The warrant is exercisable one year from the grant date at $0.105 per share. On April 15, 1999, the Company as provided in a related consulting agreement, granted one warrant to purchase an aggregate of 50,000 common shares, to one consultant for services rendered. The warrants were issued pursuant to the exemptions provided by Section 4(2) of the Securities Act and Regulation D. Investment representations were obtained and legends were placed on the certificate. In connection therewith, the Company recorded compensation expense of approximately $4,725. The exercise price was not lower than the closing bid price on the grant date and expires on December 31, 2004. The warrant is exercisable one year from the grant date at $0.08 per share. On May 18, 1999, the Company, as provided in related service or consulting agreements, granted five warrants to purchase an aggregate of 358,000 common shares, to five officers and directors for services rendered. The warrants were issued pursuant to the exemptions provided by Section 4(2) of the Securities Act and Regulation D. Investment representations were obtained and legends were placed on the certificate. In connection therewith, the Company recorded compensation expense of approximately $2,160 for the warrants granted to outside directors. The exercise price was not lower than the closing bid price on the grant date and expires on December 31, 2004. The warrants are exercisable one year from the grant date at $0.12 per share. On June 24, 1999, the Company in keeping with the intent of a previous settlement agreement with the two purchasers of the 97D preferred shares, agreed to extend the expiration date of six warrants to purchase an aggregate of 676,923 common shares, from September 30, 1999, to January 31, 2000. The warrants are currently exercisable at a price of $2.44 per share. During the three month period ended June 30, 1999, the Company raised $560,500 through the issuance of 5,142,794 restricted common shares to thirteen accredited investors . These securities were issued pursuant to the exemptions provided by Section 4(2) of the Securities Act and Regulation D. Investment representations were obtained and legends were placed on the certificates. In connection therewith the Company issued an aggregate of 211,208 shares of restricted common stock valued at $24,075 to two individuals, Mr. J. Russo and Ms. K. Davis, as compensation for placement agent services. (4) NET LOSS PER SHARE Basic net loss per share is computed in accordance with SFAS No. 128, "Earnings per Share." Basic EPS includes no dilution and is computed by dividing net loss available to common stockholders by the weighted-average number of common shares outstanding for the period. For purposes of computing the net loss available to common stockholders, preferred stock dividends and accretion of mandatorily redeemable preferred stock are deducted from the net loss. Preferred stock dividends include "imputed dividends" for preferred stock issued with a non-detachable beneficial conversion 9 feature near the date of issuance. Imputed dividends represent the aggregate difference between conversion price and thefair market value of the common stock as of the date of issuance of the preferred stock, without regard to the actual date on which the preferred stock may be converted. Shares issuable upon conversion of preferred stock, convertible debentures and upon exercise of outstanding stock options and warrants are not included since the effects would be anti-dilutive. (5) RECENT ACCOUNTING PRONOUNCEMENTS In April 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities." This SOP generally requires that all start-up costs, as defined, be expensed as incurred. Any required adjustments, pursuant to SOP 98-5, are to be accounted for as the cumulative effect of a change in accounting principle, as described in Accounting Principles Board Opinion No. 20, "Accounting Changes." Entities adopting SOP 98-5 are not required to report the pro forma effects of retroactive application. SOP 98-5 is effective in 1999 and had no material impact on the Company's consolidated results of operations or related disclosures for the six months ended June 30, 1999. (6) COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS Property and Equipment June 30, December 31, 1999 1998 - ------------------------------------------------------------------------------------- Office furniture and fixtures $ 121,000 $ 118,000 Laboratory equipment 1,020,000 1,018,000 Machinery and equipment 126,000 123,000 Computer equipment 382,000 377,000 Leasehold improvements 54,000 52,000 - ------------------------------------------------------------------------------------- 1,703,000 1,688,000 Less accumulated depreciation (1,129,000) (921,000) - ------------------------------------------------------------------------------------- Net property and equipment $ 574,000 $ 767,000 - -------------------------------------------------------------------------------------
Mandatorily Redeemable Preferred Stock The difference between the estimated fair value of the redeemable preferred shares at their issue date and the mandatory redemption amount is being ratably accreted, over the two-year term of the Series 98C Preferred Stock, by charges to accumulated deficit. At the redemption date, the carrying amount of such shares will equal the mandatory redemption amount plus accumulated dividends unless the shares are converted by the holders prior to the redemption date. Mandatorily redeemable preferred stock activity comprises the following: Six Months Ended Year-Ended June 30, December 31, 1999 1998 - ------------------------------------------------------------------------------------ Balance at beginning of period $ 1,449,000 $ - Issuance of preferred stock - 1,413,000 Conversion to common stock (1,073,000) - Accretion of amounts payable upon redemption - 36,000 - ------------------------------------------------------------------------------------ Balance at end of period $ 376,000 $ 1,449,000 - ------------------------------------------------------------------------------------
10 (7) SEGMENT REPORTING In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," which the Company adopted in 1998. The Company identifies its segments based on strategic business units that are in turn based along technological lines. These strategic business units offer products and services to different markets in accordance with their underlying technology. Accordingly, the Company's three business segments are centered on the operations associated with the LFC Process, the OCET Process and automated assembly and manufacturing systems. The Company's operations are primarily centered in the United States, however, through its various collaborative arrangements (formerly with TEK-KOL and now with Mitsubishi Corporation) the Company will continue to market the LFC Process technology on an international basis. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance of each segment based on profit or loss from operations before income taxes. The Company has no significant intersegment sales or transfers. Three months ended Automated LFC OCET June 30 Assembly Process Process Corporate Total - -------------------------------------------------------------------------------------------------------------------- 1999 Revenues $ 374,000 $ 375,000 $ 19,000 $ 13,000 $ 781,000 Net loss (322,000) (4,000) (330,000) (955,000) (1,611,000) Equity in operations of investee - - - - - Depreciation & Amortization 29,000 112,000 87,000 3,000 231,000 Engineering, research and consulting expenditures - 268,000 258,000 - 526,000 Interest expense - - - 162,000 162,000 - -------------------------------------------------------------------------------------------------------------------- 1998 Revenues 1,492,000 - 10,000 13,000 1,515,000 Net profit (loss) 45,000 (340,000) (276,000) (1,045,000) (1,616,000) Equity in operations of investee - (196,000) - - (196,000) Depreciation & Amortization 27,000 112,000 53,000 3,000 195,000 Engineering, research and consulting expenditures - 29,000 230,000 - 259,000 Interest expense - - - 325,000 325,000 - --------------------------------------------------------------------------------------------------------------------
11 Six months ended Automated LFC OCET June 30 Assembly Process Process Corporate Total - -------------------------------------------------------------------------------------------------------------------- 1999 Revenues $ 933,000 $ 500,000 $ 29,000 $ 20,000 $ 1,482,000 Net loss (489,000) (94,000) (677,000) (1,778,000) (3,038,000) Equity in operations of investee - - - - - Depreciation & Amortization 58,000 303,000 174,000 8,000 543,000 Engineering, research and consulting expenditures - 291,000 518,000 - 809,000 Interest expense 1,000 - - 311,000 312,000 - -------------------------------------------------------------------------------------------------------------------- 1998 Revenues 2,581,000 - 10,000 26,000 2,617,000 Net profit (loss) 113,000 (680,000) (580,000) (1,829,000) (2,976,000) Equity in operations of investee - (427,000) - - (427,000) Depreciation & Amortization 51,000 224,000 106,000 7,000 388,000 Engineering, research and consulting expenditures - 29,000 477,000 - 506,000 Interest expense - - - 461,000 461,000 - --------------------------------------------------------------------------------------------------------------------
Total Assets by Segment June 30, 1999 December 31, 1998 ---------------- ----------------- Identifiable assets, net Automated Assembly $ 1,290,000 $ 1,303,000 LFC Process 2,087,000 2,331,000 OCET Process 486,000 632,000 Corporate 778,000 542,000 - ------------------------------------------------------------------------------------------------ Total $ 4,641,000 $ 4,808,000 - ------------------------------------------------------------------------------------------------
(8) INVESTMENT IN LFC JOINT VENTURES In January of this year, the Company entered into a number of agreements with MLFC, a wholly-owned subsidiary of Mitsubishi Corporation, relating to the formation of a joint venture with MLFC regarding the LFC Process. The Company and MLFC entered into a LFC Joint Venture Formation Agreement, Operating Agreement, License Agreement, Services Agreement and Security Agreement with the purpose of further developing the LFC Process and licensing its use in proposed LFC Process plants. The Operating Agreement, as amended between MLFC and the Company, governs the management of the new joint venture company, LFC Tech, and is for a term extending through January 14, 2001. The purpose of LFC Tech is to conduct research and development activities with respect to the LFC Process and other approved business. The Company and MLFC each must contribute $125,000 every three months for two years to LFC Tech. Each will have a fifty percent interest in profits and losses of the business operated by LFC Tech which is managed by two managers, one from the Company and one from MLFC. The Amended and Restated Services Agreement between MLFC, LFC Tech and the Company provides that the Company will provide certain services to LFC Tech including soliciting potential customers in the U.S., developing LFC projects in the U.S. and performing engineering work. The Services Agreement is for a minimum period of two years and provides a fixed 12 payment to the Company of $1.0 million per year, payable $250,000 per quarter after an initial payment of $250,000 upon execution of the agreement. Accordingly, the Company's portion of the quarterly loss on investment in LFC investee has been eliminated against service revenues, as if the joint venture were consolidated. (9) RELATED PARTY TRANSACTIONS During the three month period ended June 30, 1999, the Company issued one 12% note payable with a face value of $50,000 to one outside director for $50,000. The principal and interest on the note payable are both due on November 15, 1999. This security was issued pursuant to the exemptions provided by Section 4(2) of the Securities Act and Regulation D. During the three month period ended June 30, 1999, the Company issued one 12% note payable with a face value of $25,000 and a warrant to purchase 17,500 shares of common stock to one outside director for $25,000. The note bears simple interest which is payable quarterly, at the Company's option, in cash or restricted common stock. In the event the Company elects to distribute common stock, the price of the common stock used to determine the number of shares to be issued will be the greater of (a) the average stock price for the last ten trading days of each quarter or (b) $0.25 per share. The principal of the note payable is due on April 23, 2001, in cash. The warrant is exercisable one year from the date of grant at a price of $0.12 per share. The exercise price was not lower than the closing bid price on the grant date and expires on December 31, 2004. In addition, the Company issued 524,790 shares of restricted common stock to this director in return for $85,000 in cash. These securities were issued pursuant to the exemptions provided by Section 4(2) of the Securities Act and Regulation D. (10) PENDING ASSET ACQUISITION As previously reported, on April 22, 1999, the Company executed an agreement (the "Acquisition Agreement") with Bluegrass Coal Development Company ("Bluegrass") and Americoal Development Company ("Americoal"), both wholly owned subsidiaries of AEI Resources ("AEI") to purchase Bluegrass' fifty percent interest in the Liquids From Coal ("LFC") Process; the ENCOAL Corporation, which owns the ENCOAL LFC demonstration plant; certain existing permits necessary to build an LFC plant near Gillette, Wyoming; and all other tangible and intangible LFC assets. The consideration to be paid by the Company for the acquisition of the above described assets consists of a $2.0 million dollar promissory note with interest thereon at the prime rate due in five years, the waiver of a $1.13 million invoice due Mitsubishi Heavy Industries by Bluegrass and the assumption of obligations attendant to ownership of ENCOAL Corporation. The acquisition also calls for a release of all claims between the parties and finalizes the dissolution of the TEK-KOL Partnership. The closing of the acquisition is conditioned upon, among other things, the financing of certain improvements to the ENCOAL plant, currently estimated at $10 million, the completion of both fuel supply and product sale agreements, the assumption or waiver of certain bond obligations, the waiver of the $1.13 million invoice due Mitsubishi Heavy Industries by Bluegrass and certain other conditions specified in the agreement. The Company is currently working towards meeting the pre-closing conditions specified in the Acquisition Agreement. At this time several pre-conditions remain outstanding, including but not limited to, the financing of certain improvements, the fuel supply agreement, product sale agreements 13 for CDL and the assumption or waiver of certain bond obligations. While the Company believes it will complete or waive these pre-conditions prior to the closing date of September 19, 1999, there can be no assurance that the acquisition will be completed or that having been completed that the ENCOAL plant will operate. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTORY NOTE This Quarterly Report on Form 10-QSB contains statements relative to (i) projections, (ii) estimates, (iii) future research plans and expenditures, (iv) potential collaborative arrangements, (v) opinions of management and (vi) the need for and availability of additional financing which may be considered "forward looking statements." The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties. These forward-looking statements are based on assumptions regarding the Company's business and technology, which involve judgments with respect to, among other things, future scientific, economic and competitive conditions, and future business decisions, as well as risk factors detailed from time to time in the Company's Securities and Exchange Commission reports including this Form 10-QSB, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated will be realized and actual results may differ materially. Readers are urged to carefully review and consider the various disclosures made by the Company in this report and in the Company's other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect the Company's business. Therefore, historical results and percentage relationships will not necessarily be indicative of the operating results of any future period. RESULTS OF OPERATIONS Net Loss per Common Share. Basic net loss per common share for the three and six month periods ended June 30, 1999, decreased approximately $0.07 per share and $0.26 per share, respectively, over the same prior year periods. The decrease in basic net loss per share for both the three and six month periods is attributable to an increase in the weighted average number of common shares outstanding, and a decrease in imputed dividends, as the net loss for both the three and six month periods remained essentially the same as the prior year. Sales and Cost of Sales. Sales and cost of sales are primarily attributable to Assembly and Manufacturing Systems, Inc. (AMS) and are recorded using the percentage of completion method. Sales and cost of sales for the three months ended June 30, 1999, decreased 74% and 63%, respectively, over the same prior year period. Sales and cost of sales for the six month period ended June 30, 1999, decreased 63% and 54%, respectively, over the same prior year period. This decline in sales for both the three and six month periods occurred in all three sectors in which the Company does business. The Company believes that the decline in sales is primarily the result of a general slowdown in 14 demand for automated assembly equipment. The continuing weakness of the high-tech sector, which has historically represented the Company's largest sector began in 1998 as a result of the turmoil in the Asian financial markets and continued into 1999. The projected length and severity of the slowdown to this sector is unknown at this time. In addition, the Company experienced a decrease in sales to the automotive sector which it believes is due to a delay in orders from two of its larger customers. The Company anticipates that sales to this sector will continue to be lower than 1998's levels. The Company also experienced a decrease in sales to its medical sector, over the same prior year period. The Company believes that the decrease is primarily the result of the merger of several of its customers, which has resulted in orders being delayed as management re-evaluates their capital spending. The affect on sales to this sector, as the result of these industry mergers, is unknown at this time. Gross margin as a percentage of sales for the three month period ended June 30, 1999, was a negative 16% compared to a positive 20% over the same prior year period. Gross margin as a percentage of sales for the six month period ended June 30, 1999, was 3% compared to 24% over the same prior year period . The decrease in gross margin is primarily attributable to the reduced business volume as previously described. The decrease in revenues experienced by the Company's automated assembly segment was partially offset by $375,000 of net revenues derived from the Company's services agreement with LFC Tech, it's joint venture with MLFC. The parties agreed to the acceleration of the second and third quarter payments, aggregating $250,000, in part due to the significant amount of work performed by the Company in evaluating CDL chemical constituents and their corresponding markets. Other Income. Other income for the three and six month periods ended June 30, 1999, remained substantially unchanged over the same prior year periods. Loss on Investment in LFC Investees. The Company's share of the losses for its LFC joint ventures (TEK-KOL and LFC Tech) for the three and six month periods ended June 30, 1999, decreased 100% over the same prior year period. The decrease is primarily attributable to the termination of the TEK-KOL Partnership and the partners of LFC Tech agreeing to perform certain services for the joint venture at their own expense, without pass through to the partnership. Engineering, Research and Consulting Expenses. Engineering, research and development expenses for the three and six month periods ended June 30, 1999, increased 103% and 60%, respectively, over the same prior year periods. The increase for both the three and six month periods is essentially attributable to an increase in expenses related to the development of the LFC Process technology, as the expenses for the development of the OCET Process technology remained substantially unchanged over the same prior year periods. The increase in expenses for the LFC Process technology are primarily related to engineering studies to reduce the cost of the first commercial plant and in evaluating the chemical constituents of CDL in order to maximize the commercial value of this product. Selling General and Administrative Expenses. Selling general and administrative expense for both the three and six month periods ended June 30, 1999, increased 9%, over the same prior year periods. The increase for both periods is principally related to the Company's opening of a marketing office in Denver, Colorado, an engineering office in Gillette Wyoming and an increase in administrative personnel at the corporate offices. The increase was basically offset by 1998 non-recurring charges of approximately $130,000 in contractual penalties associated with the issuance of the 97 D convertible preferred stock and a reduction in expenses related to public relations and financial consultants. Selling, general and administrative expenses for AMS, for the three and six month periods ended June 15 30, 1999, declined approximately 16% and 11% respectively. The decrease in expenses is primarily related to lower business volume and personnel related costs. Legal and Accounting Expenses. Legal and accounting expenses for the three and six month periods ended June 30, 1999, remained relatively unchanged and decreased 8%, respectively over the same prior year periods. The decrease in expenses for the six month period is related primarily to a reduction in legal expenses incurred in preparing and filing the Company's Form S-2 with the Securities and Exchange Commission in 1998. Depreciation and Amortization Expenses. Depreciation and amortization expense for the three and six month periods ended June 30, 1999, increased 18% and 40%, respectively over the same prior year periods, due primarily to the Company's PDU being placed in service in the third quarter of 1998 and construction of additional equipment at the Company's OCET laboratory. In addition, the Company incurred a non-recurring charge of approximately $80,000 in the first quarter of this year related to the write-off of start-up costs pertaining to its Australian LFC project. Interest Expense. Interest expense for the three and six month periods ended June 30, 1999, decreased 50% and 32%, respectively over the same prior year period. The decrease for both the three and six month periods is principally due to approximately $188,000 of imputed interest expense associated with the issuance of warrants to certain debt holders in 1998, which did not continue after September 30, 1998. This decrease was partially offset by an increase in short term notes payable primarily issued in the first quarter of 1999. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 1999, the Company had assets totaling $4.6 million, including restricted cash of $0.4 million, and a working capital deficiency of $6.1 million. The Company anticipates continued operating losses over the next twelve months and has both short-term and long-term liquidity deficiencies as of June 30, 1999. Current notes payable, convertible debentures, and associated accrued interest aggregating $5.1 million primarily due prior to September 30, 1999, contribute to the Company's working capital deficiency at June 30, 1999. Other short-term liquidity requirements are expected to be satisfied from existing cash balances, proceeds from the sale of future equity securities or other collaborative arrangements. Negotiations are on-going for the public and private placement of equity securities, the proceeds of which are intended to be used to satisfy the short-term liquidity deficiency. In the event that the Company is unable to finance operations at the current level, various administrative activities would be curtailed and certain research and development efforts would be reduced. The Company will not be able to sustain operations if it is unsuccessful in securing sufficient financing and/or generating revenues from operations. The Company had long-term liquidity deficiencies as of June 30, 1999. Over the long-term, the Company will require substantial additional funds to maintain and expand its research and development activities and ultimately to commercialize, with or without the assistance of corporate partners, any of its proposed technologies. Although there are no commitments, the Company believes the long-term liquidity deficiency should be satisfied through future equity sales, increased positive cash flows from operations, and research or other collaborative agreements, until such time, if ever, as the commercialization of the LFC and OCET Processes result in positive cash flows. The Company is seeking collaborative or other arrangements with larger well capitalized companies, under which such companies would provide additional capital to the Company in exchange for exclusive or non-exclusive licenses or other rights to certain technologies and products the Company is developing. 16 Although the Company is presently engaged in discussions with a number of suitable candidate companies, there can be no assurance that an agreement or agreements will arise from these discussions in a timely manner, or at all, or that revenues that may be generated thereby will offset operating expenses sufficiently to reduce the Company's short-term or long-term funding requirements. Cash used in operating activities for the six month period ended June 30, 1999, decreased 30% over the same period in 1998 principally as a result of an increase in payables. The use of funds from operating activities is essentially attributable to the Company's net loss of approximately $3.0 million, for both the six month periods ended June 30, 1999, and 1998. These losses were incurred primarily as a result of the Company's automated assembly operations and technology development activities. The Company's investing activities amounted to a use of funds of approximately $114,000 and $810,000 for the six month period ended June 30, 1999, and 1998, respectively. This represents a 86% decrease in investing activities over 1998. The decrease is primarily attributable to the Company's reduced investment in the now terminated TEK-KOL partnership and reduced expenditures for OCET's Process Development Unit which was substantially completed in the third quarter of 1998. For the six months ended June 30, 1999, the Company's investing activities consisted primarily of the acquisition of LFC Process equipment. Additional capital contributions to the now terminated TEK-KOL Partnership are expected to be required from time to time prior to its final pending dissolution. The Company is required to contribute one-half of any such required capital contributions. Management presently estimates that the Company may be required to contribute approximately $250,000 in 1999 for past operations and dissolution related expenditures, in the event that the acquisition of AEI's assets does not close (see Note 10 to the condensed consolidated financial statements). In addition, the Company, as of January 14, 1999, has entered into a joint venture with MLFC a wholly-owned subsidiary of Mitsubishi Corporation. (See Note 8 of the notes to condensed consolidated financial statements.) In accordance with the joint venture agreement, the Company anticipates expenditures of approximately $500,000 for 1999. This joint venture funding requirement is anticipated to be offset by the receipt of $1.0 million from the joint venture in accordance with a service agreement executed by the parties. The amount of funds used for investing activities in a given period are directly related to development requirements and funds availability. In 1999 the Company is projecting capital expenditures for equipment at OCET and AMS to remain consistent with prior years. On April 22, 1999, the Company entered into an agreement to conditionally acquire the ENCOAL Corporation and LFC demonstration plant, among other assets, from subsidiaries of AEI. (See Note 10 to the condensed consolidated financial statement.) Assuming completion of the acquisition, for which there is no assurance, the Company will have assumed various obligations in excess of $3.5 million and obtained assets which it believes are of equal or greater value. The Company intends to make improvements and obtain project financing estimated at $10 million. Other than the previously described acquisition, the Company does not have material commitments for capital expenditures as of June 30, 1999. The Company's financing activities raised approximately $1.5 million (see Note 3 to the condensed consolidated financial statements) for the six month period ended June 30, 1999, versus $2.5 million for the same prior year period. These funds were raised primarily through the private placement of debt and equity securities. The amount of money raised during a given period is dependent upon financial market conditions, technological progress and the Company's projected funding requirements. The Company anticipates that future financing activities will be influenced by the aforementioned factors. 17 As noted previously, significant future financing activities will be required to fund future operating and investing activities and to maintain debt service. While the Company is engaged in continuing negotiations to secure additional capital and financing, there is no assurance such funding will be available or if received will be adequate. YEAR 2000 The Year 2000 issue exists because many computer systems and applications use two-digit date fields to designate a year. As the century date change occurs, date-sensitive systems may recognize the Year 2000 as 1900, or not at all. This inability to recognize or properly treat the Year 2000 may cause systems to process financial and operational information incorrectly. The Company recognizes the need to ensure its operations will not be adversely impacted by Year 2000 software failures. Software failures due to processing errors potentially arising from calculations using the Year 2000 date are a known risk. The Company has assessed the impact on its computer systems of the Year 2000 issue. The financial impact of making the required systems changes are not expected to be material to the Company's consolidated financial position, results of operations or cash flows. Year 2000 costs incurred through June 30, 1999, have been charged to operations and have not been material. Additionally, the Company is reviewing the Year 2000 issue with it's suppliers, shippers, customers, and other external business partners. There can by no assurance, however, that all the systems of its suppliers, shippers, customers and other external business partners will function adequately. If the systems of the Company's suppliers, shippers, customers, and other external business partners are not Year 2000 compliant, it could have a material adverse effect on the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK [NONE] PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company and its subsidiaries are from time to time involved in litigation arising in the ordinary course of their respective businesses. The Company was named a party in the Walsh vs. AMS case, filed on September 7, 1997, in the San Diego Superior Court. The Walsh case relates to events occurring prior to the acquisition of AMS by the Company. The lawsuit asserted claims, for among other things, breach of contract relating to a loan of approximately $300,000. AMS filed an answer denying liability. The case was tried and a verdict rendered in favor of AMS. On October 26, 1998, AMS filed a lawsuit against Anatol Automation and Anatol Manufacturing in Orange County Superior Court. The lawsuit sought approximately $600,000 in compensatory damages and in excess of $2,000,000 in punitive damages for interference with advantageous business relationships, interference with contract, and appropriation of trade secrets in violation of the California Uniform Trade Secret Act. The case was settled by the parties prior to going to trial. 18 ITEM 2. CHANGES IN SECURITIES During the three month period ended June 30, 1999, the Company extend the due dates on $750,000 of notes payable due June 27, 1999, to August 16, 1999. Additionally, the Company granted two warrants to purchase 200,000 shares of common stock, to the holder of five notes payable aggregating $500,000, for accrued interest through June 27, 1999, valued at $21,107. The warrants are exercisable one year from the date of grant. The exercise prices were not lower than the closing bid price on the grant date and expire on December 31, 2004. One warrant to purchase 150,000 shares of common stock may be exercised at $0.16 per share and another warrant to purchase 50,000 shares of common stock may be exercised at $0.18 per share. During the three month period ended June 30, 1999, the Company issued additional incentive stock options, at fair market value pursuant to its 1996 Omnibus Stock Plan. The incentive options are exercisable for a total of 685,000 shares of common stock at $0.125 per share, the closing bid price on the grant date, to employees of the Company. The options were granted in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities Act and Regulation D promulgated thereunder. The options are exercisable upon effective registration under the Securities Act of 1933 or the common shares underlying the options are issuable under an exemption from the registration requirements under the Securities Act. The options shall expire on April 1, 2004. On April 1, 1999, the Company as provided in related service or consulting agreements, granted twelve warrants to purchase an aggregate of 275,000 common shares, to five directors and seven consultants for services rendered. The warrants were issued pursuant to the exemptions provided by Section 4(2) of the Securities Act and Regulation D. Investment representations were obtained and legends were placed on the certificates. In connection therewith, the Company recorded compensation expense to non-employees of approximately $9,720. The exercise prices were not lower than the closing bid price on the grant date and expire on December 31, 2004. The warrants are exercisable one year from the grant date at $0.125 per share. On April 8, 1999, the Company as provided in a related consulting agreement, granted one warrant to purchase an aggregate of 48,000 common shares, to one consultant for services rendered. The warrants were issued pursuant to the exemptions provided by Section 4(2) of the Securities Act and Regulation D. Investment representations were obtained and legends were placed on the certificate. In connection therewith, the Company recorded compensation expense of approximately $2,160. The exercise price was not lower than the closing bid price on the grant date and expires on December 31, 2004. The warrant is exercisable one year from the grant date at $0.08 per share. On April 15, 1999, the Company as provided in a related consulting agreement, granted one warrant to purchase an aggregate of 50,000 common shares, to one consultant for services rendered. The warrants were issued pursuant to the exemptions provided by Section 4(2) of the Securities Act and Regulation D. Investment representations were obtained and legends were placed on the certificate. In connection therewith, the Company recorded compensation expense of approximately $4,725. The exercise price was not lower than the closing bid price on the grant date and expires on December 31, 2004. The warrant is exercisable one year from the grant date at $0.105 per share. On May 18, 1999, the Company, as provided in related service or consulting agreements, granted five warrants to purchase an aggregate of 358,000 common shares, to five officers and directors for services rendered. The warrants were issued pursuant to the exemptions provided by Section 4(2) of the 19 Securities Act and Regulation D. Investment representations were obtained and legends were placed on the certificate. In connection therewith, the Company recorded compensation expense of approximately $2,160 for the warrants granted to outside directors. The exercise price was not lower than the closing bid price on the grant date and expires on December 31, 2004. The warrants are exercisable one year from the grant date at $0.12 per share. On June 24, 1999, the Company in keeping with the intent of a previous settlement agreement with the two purchasers of the 97D preferred shares, agreed to extend the expiration date of six warrants to purchase an aggregate of 676,923 common shares, from September 30, 1999, to January 31, 2000. The warrants are currently exercisable at a price of $2.44 per share. During the three month period ended June 30, 1999, the Company raised $560,500 through the issuance of 5,142,794 restricted common shares to thirteen accredited investors . These securities were issued pursuant to the exemptions provided by Section 4(2) of the Securities Act and Regulation D. Investment representations were obtained and legends placed on the certificates. In connection therewith the Company issued an aggregate of 211,208 shares of restricted common stock valued at $24,075 to two individuals, Mr. J. Russo and Ms. K. Davis, as compensation for placement agent services. During the three month period ended June 30, 1999, the Company issued one 12% note payable with a face value of $50,000 to one outside director for $50,000. The principal and interest on the note payable are both due on November 15, 1999. This security was issued pursuant to the exemptions provided by Section 4(2) of the Securities Act and Regulation D. During the three month period ended June 30, 1999, the Company issued one 12% note payable with a face value of $25,000 and a warrant to purchase 17,500 shares of common stock to one outside director for $25,000. The note bears simple interest which is payable quarterly, at the Company's option, in cash or restricted common stock. In the event the Company elects to distribute common stock, the price of the common stock used to determine the number of shares to be issued will be the greater of (a) the average stock price for the last ten trading days of each quarter or (b) $0.25 per share. The principal of the note payable is due on April 23, 2001, in cash. The warrant is exercisable one year from the date of grant at a price of $0.12 per share. The exercise price was not lower than the closing bid price on the grant date and expires on December 31, 2004. In addition, the Company issued 524,790 shares of restricted common stock to this director in return for $85,000 in cash. These securities were issued pursuant to the exemptions provided by Section 4(2) of the Securities Act and Regulation D. ITEM 3. DEFAULTS UPON SENIOR DEBT SECURITIES [NONE] ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. [NONE] 20 ITEM 5. OTHER INFORMATION On May 26, 1999, Joseph A. Savoca, Chairman of the Board and Chief Executive Officer (CEO) resigned from his position as CEO and agreed to continue serving as Chairman. The Board of Directors on that same day elected Michael L. Rose as CEO, succeeding Mr. Savoca. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 4.1 Form of Restricted Stock Subscription Agreement (1) 4.2 Promissory Note dated April 14, 1999, for $50,000 (1) 4.3 Promissory Note dated April 23, 1999, for $25,000 (1) 4.4 Form of Extension Agreement dated June 24, 1999 (1) 4.5 Form of Note Extension Agreement dated March 24, 1999 (1) 10.1 Form of Compensation Agreement dated March 1, 1999 (1) 27.1 Financial Data Schedule (1) - -------------------- (1) Filed herewith. (b) Reports on 8-K: Initially filed on May 10, 1999, and amended on May 18, 1999, the Company reported on its Current Report on Form 8-K, filed with the Securities and Exchange Commission, that it had entered into an agreement for the purchase of various assets from subsidiaries of AEI Resources. 21 PART III. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SGI INTERNATIONAL /s/ MICHAEL L. ROSE August 12, 1999 - ------------------------------------ Michael L. Rose, President and Chief Executive Officer /s/ GEORGE E. DONLOU August 12, 1999 - ------------------------------------ George E. Donlou Vice President Finance and Controller 22 EX-4.1 2 FORM OF RESTRICTED STOCK SUBSCRIPTION AGREEMENT THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"). THIS SUBSCRIPTION AGREEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE SECURITIES MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT AND UNDER PROVISIONS OF APPLICABLE STATE SECURITIES LAWS. RESTRICTED STOCK SUBSCRIPTION AGREEMENT SGI INTERNATIONAL THIS AGREEMENT is executed in reliance upon the transaction exemption afforded by Regulation D as promulgated by the Securities and Exchange Commission ("SEC"), under the Securities Act of 1933, as amended (the "Act"). This Agreement has been executed by the undersigned in connection with the private placement of restricted stock (hereinafter referred to as the "Restricted Stock") of SGI INTERNATIONAL (OTC Bulletin Board symbol "SGII"), located at 1200 Prospect Street, Suite 325, La Jolla, CA 92037, a corporation organized under the laws of Utah, USA (hereinafter referred to as the "Company"). This Subscription and, if accepted by the Company, the offer and sale of the Restricted Stock is being made in reliance upon the provisions of Regulation D under the Act. The Closing Date shall be determined in accordance with Sections 1.1 herein. Subscriber, ________________ (hereinafter referred to as the "Subscriber" or "Purchaser"), hereby represents and warrants to, and agrees with the Company as follows: Section 1. Agreement to Subscribe; Purchase Price. 1.1 Closing and Registration. The Company will sell, and the Subscriber will buy an aggregate of ____________________(____________) shares of Restricted Stock for an aggregate purchase price of _____________ ($___________) U.S. Dollars (the "Purchase Price"). The Restricted Stock may not be sold, even if registered during that time, for a period six (6) months from the issuance date. The Company agrees that it will include the Restricted Stock issued hereunder in the next Registration Statement filed by the Company. 1.2 Form of Payment. Subscribers shall pay the Purchase Price by delivering good funds in United States Dollars by to SGI International by wire transfer. Upon receipt of such funds Company shall cause such Restricted Stock to be issued and delivered to Purchaser within five (5) of such receipt (the "Closing Date"). Section 2. Representations and Warranties of the Subscribers. Subscribers acknowledge, represent, warrant and agree as follows: 2.1 Organization and Authorization. Subscriber is an Accredited Investor and has all requisite power and authority to purchase and hold the Restricted Stock. 2.2 Evaluation of Risks. Subscriber has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of, and bearing the economic risks entailed by, an investment in the Company and of protecting its interests in connection with this transaction. Subscriber recognizes that its investment in the Company involves a high degree of risk and the Subscriber can afford the complete loss of Subscriber's investment. 2.3 Disclosure Documentation. Subscriber has received and reviewed copies of the Company's reports filed under the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the Act, including its 10-Ks, 10-Qs, 8-K's, and registration statements, filed by the Company since December 31, 1998, (collectively, the "Reports"). Except for the Reports, Subscribers are not relying on any other information relating to the offer and sale of the Securities. Subscriber acknowledges that the Company has offered to make available any additional public information that the Subscriber may reasonably request, including technical information, and other material information about the Company and Subscriber has been offered Company's full and unconditional cooperation in making such information available to Subscriber and acknowledge that the Company has recommended that the Subscribers request and review such information prior to making an investment decision. No oral or written representations have been made, or oral or written information furnished to the undersigned or its advisors, if any, in connection with the offering of the Securities which were or are in any way inconsistent with the Reports. 2.4 Opportunity to Ask Questions. Subscriber has had a reasonable opportunity to ask questions of and receive answers from the Company concerning the Company and the offering, and all such questions, if any, have been answered to the full satisfaction of Subscriber. 2.5 Reports Constitute Sole Representations. Except as set forth in the Reports, no representations or warranties have been made to Subscriber by (a) the Company or any agent, employee or affiliate of the Company or (b) any other person, and in entering into this transaction Subscriber are not relying upon any information, other than that contained in the Reports and the results of independent investigation by Subscriber. 2.6 Subscriber Is An Accredited Investor. The undersigned is an "Accredited Investor" as defined below who represents and warrants he is included within one or more of the following categories of "Accredited Investors." (i) Any bank as defined in Section 3(a)(2) of the Act, or any savings and loan associated or other institution as defined in Section 3(a)(5)A of the Act whether acting in it individual or fiduciary capacity; any broker or dealer registered pursuant to Section 15 of the 1934 Act; any insurance company as defined in Section 2(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivision, for the benefits of its employees if such plan has total assets in excess of $5,000,000; and employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment advisor, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors; (ii) Any private business development company as defined in Section 202 (a)(22) of the Investment Advisers Act of 1940; (iii) Any organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000; (iv) Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer; (v) Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000; (vi) Any natural person who had an individual income in excess of $200,000 in each of the two (2) most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching that same income level in the current year; (vii) Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Section 230.506(b)(2)(ii) of Regulation D under the Act; (viii) Any entity in which all of the equity owners are accredited investors; and (ix) Any self-directed employee benefit plan with investment decisions made solely by persons that are accredited investors within the meaning of Rule 501 of Regulation D promulgated under the Act. 2.7 No Registration, Review or Approval. Subscriber acknowledges and understands that the limited private offering and sale of Restricted Stock pursuant to this Agreement has not been reviewed or approved by the SEC or by any state securities commission, authority or agency, and is not registered under the Act or under the securities or "blue sky" laws, rules or regulations of any state. Subscriber acknowledges, understands and agrees that the Restricted Stock is being offered and sold hereunder pursuant to (i) a private placement exemption to the registration provisions of the Act pursuant to Section 3(b) or Section 4(2) of such Act and Regulation D promulgated under such Act, and (ii) a similar exemption to the registration provisions of applicable state securities laws. Subscriber understands that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of Subscriber set forth herein in order to determine the applicability of such exemptions and the suitability of Subscriber to acquire the Restricted Stock. Subscriber will advise Company of the state of its residence prior to executing this or any other agreement to enable the Company to comply with applicable "blue sky" laws. 2.8 Investment Intent. Without limiting its ability to resell the Restricted Stock pursuant to an effective registration statement, Subscriber is acquiring the Restricted Stock solely for its own account and not with a view to the distribution, assignment or resale to others. Subscriber understands and agrees that it may bear the economic risk of its investment in the Restricted Stock for an indefinite period of time. Subscriber does not now have any short position or hedge position in the Company's Common Stock nor will the Subscriber make any promissory notes and/or pledges to that effect on the Company's Common Stock. 2.9 No Advertisements. Subscriber is not subscribing for Restricted Stock as a result of or subsequent to any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio, or presented at any seminar or meeting. 2.10 Registration Rights. The Registration obligations of Company are described above in Section 1.1. Section 3. Representations and Warranties of the Company. Company acknowledges, represents, and warrants as follows: 3.1 Organization/Qualification. The Company is a corporation duly organized and validly existing under the laws of the State of Utah and is in good standing under such laws. The Company has all requisite corporate power and authority to own, lease and operate its properties and assets, and to carry on its business as presently conducted. The Company is qualified to do business as a foreign corporation in each jurisdiction in which the ownership of its property or the nature of its business requires such qualification, except where failure to so qualify would not have a material adverse effect on the Company. 3.2 Accuracy of Reports and Information. To the best of its knowledge, the Company is in compliance, to the extent applicable, with all reporting obligations under either Section 12(b), 12(g) or 15(d) of the 1934 Act, and shall use its best efforts to maintain such status on a timely basis. The Company has registered its Common Stock pursuant to Section 12 of the 1934 Act and the Common Stock is listed and trades on the OTC Bulletin Board. The Company has filed all material required to be filed pursuant to all reporting obligations, under either Section 13(a) or 15(d) of the 1934 Act for a period of at least twelve (12) months immediately preceding the offer and sale of the Securities (or for such shorter period that the Company has been required to file such material). 3.3 SEC Filings/Full Disclosure. For a period of at least twelve (12) months immediately preceding this offer and sale, or such shorter period that the Company has been required to file such Reports as defined herein, to the best of the Company's knowledge (i) none of the Company's filings with the Securities and Exchange Commission contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made, not misleading, and (ii) the Company has timely filed all requisite forms, reports and exhibits thereto with the Securities and Exchange Commission. There is no fact known to the Company (other than general economic conditions known to the public generally) that has not been publicly disclosed by the Company or disclosed in writing to the Subscribers which (i) could reasonably be expected to have a material adverse effect on the condition (financial or otherwise) or on earnings, business affairs, properties or assets of the Company, or (ii) could reasonably be expected to materially and adversely affect the ability of the Company to perform its obligations pursuant to this Agreement. 3.4 Authorization. The Company has all requisite corporate right, power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. All corporate action on the part of the Company, its directors and stockholders necessary for the authorization, execution, delivery and performance of this Agreement by the Company, the authorization, sale, issuance and delivery of the Securities and the performance of the Company's obligations hereunder has been taken. This Agreement has been duly executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies, and to limitations of public policy as they may apply to the indemnification provisions set forth in this Agreement. Upon their issuance and delivery pursuant to this Agreement, the Securities will be validly issued, fully paid and nonassessable and will be free of any liens or encumbrances; provided, however, that the Securities are subject to restrictions on transfer under state and/or federal securities laws. The issuance and sale of the Securities will not give rise to any preemptive right or right of first refusal or right of participation on behalf of any person. 3.5 No Conflict. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default, or give rise to a right of termination, cancellation or acceleration of any material obligation or to a loss of a material benefit, under, any provision of the Articles of Incorporation, and any amendments thereto, Bylaws, Stockholders Agreements and any amendments thereto of the Company or any material mortgage, indenture, lease or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree statute, law, ordinance, rule or regulation applicable to the Company, its properties or assets and which would have a material adverse effect on the Company's business and financial condition. 3.6 No Undisclosed Liabilities or Events. The Company has no liabilities or obligations other than those disclosed in the Reports, this Agreement or those incurred in the ordinary course of the Company's business since December 31, 1998, and which individually or in the aggregate, do not or would not have a material adverse effect on the properties, business, condition (financial or otherwise), results of operations or prospects of the Company. No event or circumstances has occurred or exists with respect to the Company or its properties, business, condition (financial or otherwise), results of operations or prospects, which, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed. 3.7 No Default. The Company is not in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust or other material instrument or agreement to which it is a party or by which it is or its property is bound, and neither the execution, nor the delivery by the Company, nor the performance by the Company of its obligations under this Agreement, including the conversion or exercise provision of the Securities, will conflict with or result in the breach or violation of any of the terms or provisions of, or constitute a default or result in the creation or imposition of any lien or charge on any assets or properties of the Company under, any material indenture, mortgage, deed of trust or other material agreement applicable to the Company or instrument to which the Company is a party or by which it is bound or any statute or the Articles of the Company, or any decree, judgment, order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or its properties, or the Company's listing agreement for its Common Stock. 3.8 Governmental Consent, etc. No consent, approval or authorization of or designation, declaration or filing with any governmental authority on the part of the Company is required in connection with the valid execution and delivery of this Agreement, or the offer, sale or issuance of the Securities, or the consummation of any other transaction contemplated hereby, except as may be required by applicable securities laws. 3.9 Intellectual Property Rights. Except as disclosed in the Reports, the Company has sufficient trademarks, trade names, patent rights, copyrights and licenses to conduct its business as presently conducted in the Reports. To the Company's knowledge, neither the Company nor its products is infringing or will infringe any trademark, trade name, patent right, copyright, license, trade secret or other similar right of others currently in existence; and there is no claim being made against the Company regarding any trademark, trade name, patent, copyright, license, trade secret or other intellectual property right which could have a material adverse effect on the business or financial condition of the Company. 3.10 Material Contracts. Except as set forth in the Reports, the agreements to which the Company is a party described in the Reports are valid agreements, in full force and effect, and the Company is not in material breach or material default under any of such agreements. 3.11 Litigation. Except as disclosed in the Reports, there is no action, proceeding or investigation pending, or to the Company's knowledge threatened, against the Company which might result, either individually or in the aggregate, in any material adverse change in the business, prospects, conditions, affairs or operations of the Company. The Company is not a party to or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. 3.12 Title to Assets. Except as set forth in Reports, the Company has good and marketable title to all properties and material assets described in the Reports as owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than such as are not material to the business of the Company. 3.13 Subsidiaries. Except as disclosed in the Reports, the Company does not presently own or control, directly or indirectly, any interest in any other corporation, partnership, association or other business entity. 3.14 Required Governmental Permits. The Company is in possession of and operating in compliance with all authorizations, licenses, certificates, consents, orders and permits from state, federal and other regulatory authorities which are material to the conduct of its business, all of which are valid and in full force and effect. 3.15 Listing. The Company will use its best efforts to maintain the listing of its Common Stock on the OTC Bulletin Board or other organized United States market or quotation system. The Company has not received any notice, oral or written, regarding continued listing and, as long as the Preferred Stock and Warrants are outstanding, the Company will take no action which would impact their continued listing or eligibility of the Company for such listing. 3.16 Other Outstanding Securities/Financing Restrictions. Except as disclosed in the Reports, the Company has no outstanding restricted shares, or shares of Common Stock sold under Regulation S, Regulation D or outstanding under any other exemption from registration, which are available for sale as unrestricted ("free trading") stock. 3.17 Registration Alternative. The Company covenants and agrees that for so long as any of the shares remain outstanding and continue to be "restricted securities" within the meaning of Rule 144 under the Act, the Company shall permit resales of the underlying Common Stock pursuant to Rule 144 under the Act. The Company and the Subscribers shall provide the Transfer Agent any and all papers necessary to complete the transfer under Rule 144, including, but not limited to, opinions of counsel to the Transfer Agent, and the Company shall continue to file all material required to be filed pursuant to Sections 13(a) or 15(d) of the 1934 Act. 3.18 Capitalization. The authorized capital stock of the Company consists of 75,000,000 shares of Common Stock, no par value per share, 20,000,000 shares of non-voting Preferred Stock, $0.01 par value. All issued and outstanding hares of Common Stock have been duly authorized and validly issued and are fully paid and nonassessable. Section 4. Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the SEC which may at any time permit the sale of the Restricted Stock to the public without registration, the Company agrees to use its best efforts to: (i) make and keep public information available, as those terms are understood and defined in Rule 144 under the Act, at all times after the effective date on which the Company becomes subject to the reporting requirements of the Act or the 1934 Act; (ii) use its best efforts to file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; (iii) to furnish to Purchaser forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144, and of the Act and the 1934 Act, a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as Purchaser may reasonably request in availing itself of any rule or regulation of the SEC allowing Purchaser to sell any such Securities without registration. Section 5. Representations and Warranties of the Company and Subscribers. Each of the Subscribers and the Company represent to the other the following with respect to itself: 5.1 Subscription Agreement. The Subscription Agreement has been duly authorized, validly executed and delivered on behalf of the Company and Subscriber and is a valid and binding agreement in accordance with its terms, subject to general principles of equity and to bankruptcy or other laws affecting the enforcement of creditors' rights generally. 5.2 No-Conflict. The execution and delivery of this Agreement does not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or to a loss of a material benefit, under, any provision of the Certificate of Incorporation, and any amendments thereto, Bylaws and any amendments thereto of the Company or any material mortgage, indenture, lease or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree statute, law, ordinance, rule or regulation applicable to the Company, its properties or assets. 5.3 Approvals. Neither the Company nor Subscriber is aware of any authorization, approval or consent of any governmental body which is legally required for the issuance and sale of the Restricted Stock. 5.4 Indemnification. Each of the Company and the Subscriber agree to indemnify the other and to hold the other harmless from and against any and all losses, damages, liabilities, costs and expenses (including reasonable attorneys' fees) which the other may sustain or incur in connection with the breach by the indemnifying party of any representation, warranty or covenant made by it in this Agreement. Section 6. Registration or Exemption Requirements. Subscriber acknowledges and understands that the Restricted Stock may not be resold or otherwise transferred except in a transaction registered under the Act and any applicable state securities laws or unless an exemption from such registration is available. Subscriber understands that the Restricted Stock will be imprinted with a legend that prohibits the transfer of the Restricted Stock unless (i) they are registered or such registration is not required, and (ii) if the transfer is pursuant to an exemption from registration other than Rule 144 under the Act and, if the Company shall so request in writing, an opinion of counsel reasonably satisfactory to the Company is obtained to the effect that the transaction is so exempt. Section 7. Legend. The certificates representing the Securities shall be subject to a legend restricting transfer under the Act, such legend to be substantially as follows: "THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY." The certificates representing the Restricted Stock, and each certificate issued in transfer thereof, will also bear any legend required under any applicable state securities law. Section 8. Stock Delivery Instructions. The Restricted Stock Certificates shall be delivered to Subscriber on a delivery versus payment basis. Section 9. Miscellaneous. 9.1 Governing Law/Jurisdiction. This Agreement will be construed and enforced in accordance with and governed by the laws of the State of California, except for matters arising under the Act, without reference to principles of conflicts of law. 9.2 Confidentiality. If for any reason the transactions contemplated by this Agreement are not consummated, each of the parties hereto shall keep confidential any information obtained from any other party (except information publicly available or in such party's domain prior to the date hereof, and except as required by court order) and shall promptly return to the other parties all schedules, documents, instruments, work papers or other written information, without retaining copies thereof, previously furnished by it as a result of this Agreement or in connection herewith. 9.3 Facsimile/Counterparts/Entire Agreement. Except as otherwise stated herein, in lieu of the original, a facsimile transmission or copy of the original shall be as effective and enforceable as the original. This Agreement may be executed in counterparts which shall be considered an original document and which together shall be considered a complete document. This Agreement and Exhibits hereto constitute the entire agreement between the Subscribers and the Company with respect to the subject matter hereof. This Agreement may be amended only by a writing executed by all parties. 9.4 Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 9.5 Entire Agreement. This Agreement and Exhibits hereto constitute the entire agreement between the Subscribers and the Company with respect to the subject matter hereof. This Agreement may be amended only by a writing executed by all parties. 9.6 Reliance by Company. The Subscribers represent to the Company that the representations and warranties of the Subscribers contained herein are complete and accurate and may be relied upon by the Company in determining the availability of an exemption from registration under federal and state securities laws in connection with a private offering of securities. 9.7 Confidentiality. Each of the Company and the Subscribers agree to keep confidential and not to disclose to or use for the benefit of any third party the terms of this Agreement or any other information which at any time is communicated by the other party as being confidential without the prior written approval of the other party; provided, however, that this provision shall not apply to information which, at the time of disclosure, is already part of the public domain (except by breach of this Agreement) and information which is required to be disclosed by law. 9.8 Legal Fees and Expenses. Each of the parties shall pay its own fees and expenses. 9.9 Authorization. Each of the parties hereto represents that the individual executing this Agreement on its behalf has been duly and appropriately authorized to execute the Agreement. IN WITNESS WHEREOF, this Subscription Agreement was duly executed on the date first written below. Agreed to and Accepted on this ____ day of _______, 1999 SGI INTERNATIONAL By____________________________ Title: [Name & Address] By___________________________ Name: _____________________ Title:_______________________ Executed this ____ day of ______, 1999 EX-4.2 3 PROMISSORY NOTE DTD 4/14/99 PROMISSORY NOTE $ 50,000 April 14, 1999 - --------- -------------- SECTION ONE TERMS OF NOTE FOR VALUE RECEIVED, SGI INTERNATIONAL, a Utah Corporation (the "Debtor"), located at 1200 Prospect Street, Suite 325, La Jolla, CA 92037 promises to pay to the order of A.H. Kerr Foundation (hereinafter "Kerr") of 16183 Royal Oak Road, Encino, CA 91436 the principal sum of Fifty Thousand ($50,000) Dollars with interest thereon at the rate of twelve(12%) percent per annum, payable on November 15, 1999, in cash. The original loan that is the subject of this Promissory Note was made on April 14, 1999. SECTION TWO PREPAYMENT OF NOTE Prepayment of the full principal balance, along with all unpaid interest, or any portion of the principal balance, along with any portion thereof of unpaid interest, is permitted at any time without penalty. SECTION THREE EFFECT OF WAIVER OF RIGHTS BY KERR Kerr is not under any obligation to exercise any of its rights under this note, and failure to exercise its rights under this note or to delay in exercising any of its rights shall not be deemed a waiver of or in any manner impair any of the rights of Kerr. SECTION FOUR CUMULATIVE RIGHTS AND REMEDIES The rights and remedies of Kerr specified in this note are cumulative and do not exclude any other rights or remedies it may otherwise have. SECTION FIVE ACCELERATION ON INSOLVENCY OF DEBTOR If Debtor shall be adjudged bankrupt, or file a petition in bankruptcy, or have a petition in bankruptcy filed against him, this note shall become due and payable immediately without demand or notice. SECTION SIX WAIVER OF PRESENTMENT, PROTEST, AND NOTICE OF DISHONOR Debtor hereby waives all acts on the part of Kerr required in fixing the liability of the party, including among other things presentment, demand, notice of dishonor, protest, notice of protest, notice of nonpayment, and any other notice. SECTION SEVEN CHOICE OF LAWS This note shall be governed by and construed in accordance with the laws of California in all respects, including matters of construction, validity and performance. SECTION EIGHT COSTS OF COLLECTION Debtor shall pay on demand all costs of collection, including legal expenses and attorney fees, incurred by Kerr in enforcing this note on default. SECTION NINE INTEREST CHARGES If a law, which applies to this note and which sets the maximum interest amount, is finally interpreted so that the interest in connection with this note exceed the permitted limits, then: (1) any such interest shall be reduced by the amount necessary to reduce the interest to the permitted limit; and (2) any sums already collected (if any) from the Debtor which exceed the permitted limits will be refunded to the Debtor. The note holder may choose to make this refund by reducing the principal Debtor owes under this note or by making a direct payment to the Debtor. If a refund reduces the principal, the reduction will be treated as a partial payment. Dated: April 14, 1999 SGI INTERNATIONAL /s/ JOSEPH SAVOCA - ----------------------- Authorized Signatory EX-4.3 4 PROMISSORY NOTE DTD 4/23/99 PROMISSORY NOTE $25,000 April 23, 1999 - ------------- -------------- SECTION ONE TERMS OF NOTE FOR VALUE RECEIVED, SGI INTERNATIONAL, a Utah Corporation (the "Debtor"), located at 1200 Prospect Street, Suite 325, La Jolla, CA 92037 promises to pay to the order of Jeffrey L. Smith (hereinafter "Holder") of 1087 West River street, Suite 200, Boise, ID 83702, the principal sum of Twenty Five Thousand ($25,000) Dollars with interest thereon at the rate of twelve (12%) percent per annum, payable on March 23, 2001, in cash. The original loan that is the subject of this Promissory Note was made on April 23, 1999. SECTION TWO INTEREST PAYABLE This note will bear simple interest at 12% per annum. The interest will be payable quarterly, at the Company's option, in cash or in restricted common stock of the Company. In the event the Company elects to distribute common stock, the price of the common stock used to determine the number of shares to be issued will be the greater of (a) the average stock price for the last 10 trading days of each calendar quarter or (b) $0.25 per share. SECTION THREE PREPAYMENT OF NOTE Prepayment of the full principal balance, along with all unpaid interest, or any portion of the principal balance, along with any portion thereof of unpaid interest, is permitted at any time without penalty. SECTION FOUR EFFECT OF WAIVER OF RIGHTS BY HOLDER Holder is not under any obligation to exercise any of his rights under this note, and failure to exercise his rights under this note or to delay in exercising any of its rights shall not be deemed a waiver of or in any manner impair any of the rights of Holder. SECTION FIVE CUMULATIVE RIGHTS AND REMEDIES The rights and remedies of Holder specified in this note are cumulative and do not exclude any other rights or remedies it may otherwise have. SECTION SIX ACCELERATION ON INSOLVENCY OF DEBTOR If Debtor shall be adjudged bankrupt, or file a petition in bankruptcy, or have a petition in bankruptcy filed against him, this note shall become due and payable immediately without demand or notice. SECTION SEVEN WAIVER OF PRESENTMENT, PROTEST, AND NOTICE OF DISHONOR Debtor hereby waives all acts on the part of Holder required in fixing the liability of the party, including among other things presentment, demand, notice of dishonor, protest, notice of protest, notice of nonpayment, and any other notice. SECTION EIGHT REGISTRATION RIGHTS SGI agrees that any common stock issued as interest shall be granted "piggyback" registration rights as set forth herein. The Corporation shall be obligated to Holder as follows: During the period of one year from the date hereof, whenever the Corporation proposes to file with the SEC a Registration Statement (other than (i) S-8 registering solely securities issued pursuant to an employee benefit plan or, (ii) a transaction subject to rule 145 promulgated under the Act), it shall give written notice of such proposed filing to Holder at its address as it appears on the records of the Corporation, and shall offer to include in such filing all common shares issuable as interest. Holder's written request for inclusion must be received by the Corporation, not less than 10 days prior to the proposed filing date. If such Registration Statement relates to an underwritten offering, and if the managing underwriter for said offering advises the Company in writing that the inclusion of all or any portion of such shares would be detrimental to said offering, or with respect to any registration statement whether the offering is underwritten or not, if upon due consideration, the Board of Directors reasonably determines that the inclusion of all or any portion of such shares would be detrimental to the best interests of the Company, the shares shall not be included in the Registration Statement. In the event that the underwriter or the Board of Directors concludes that a portion of such securities shall be included in the offering or the registration statement and would not be detrimental thereto, and such portion is less than the amount requested for inclusion, then the amount to be included shall be prorated among the requesting Holder and other security holders of the Company possessing similar registration rights. SECTION NINE CHOICE OF LAWS This note shall be governed by and construed in accordance with the laws of California in all respects, including matters of construction, validity and performance. SECTION TEN COSTS OF COLLECTION Debtor shall pay on demand all costs of collection, including legal expenses and attorney fees, incurred by Holder in enforcing this note on default. SECTION ELEVEN INTEREST CHARGES If a law, which applies to this note and which sets the maximum interest amount, is finally interpreted so that the interest in connection with this note exceed the permitted limits, then: (1) any such interest shall be reduced by the amount necessary to reduce the interest to the permitted limit; and (2) any sums already collected (if any) from the Debtor which exceed the permitted limits will be refunded to the Debtor. The note Holder may choose to make this refund by reducing the principal Debtor owes under this note or by making a direct payment to the Debtor. If a refund reduces the principal, the reduction will be treated as a partial payment. Dated: April 23, 1999 SGI INTERNATIONAL /s/ MICHAEL L. ROSE - ---------------------------- Michael L. Rose, President EX-4.4 5 FORM OF EXTENSION AGREEMENT DTD 06/24/99 First Amended EXTENSION AGREEMENT This First Amended Extension Agreement (the "Agreement") is made effective as of June 24, 1999 (the "Effective Date"), by and between SGI International, a Utah Corporation ("SGI" or the "Company") and ____________________________ ("Investors"). RECITALS A. On August 12, 1997, the parties hereto entered into a Series 97-D Preferred Stock Purchase Agreement (the "Agreement") and a Registration Rights Agreement, the latter of which required registration of the stock underlying warrants and preferred shares that were being purchased; and, B. As part of the August 12, 1997 transaction the Company issued warrants to Investors in the amount of $550,000 per tranche, in three separate tranches with each tranche expiring on dates certain. C. Both Company and Investors are interested in extending the terms of those tranches (which were previously extended) to January 31, 2000. D. Pursuant to the Purchase Agreement and Registration Rights Agreement executed concurrently with the Purchase Agreement Investors claims SGI owes them money pursuant to a penalty provision and SGI claims that it did not cause any delay in registration and thus owes no money to Investors. AGREEMENT NOW THEREFORE, in consideration of the covenants and conditions of this Agreement the parties do hereby agree as follows: 1. Extension. SGI hereby agrees that in consideration of the previous waiver of the penalty claimed by Investors and for other good and valuable consideration, the term and expiration date of all warrants issued to Investors is hereby extended to and including January 31, 2000. 2. Term. This Agreement shall be effective on the Effective Date and terminate on January 31, 2000. 3. Renegotiation. The parties hereto acknowledge that the warrant extension would not have value unless Company is willing to renegotiate with Investors prior to January 31, 2000, the terms of the warrants and/or reprice them to a value that would provide consideration to Investors. Company and Investors hereby agree to negotiate in good faith within a period of thirty (30) days prior to January 31, 2000 the terms of the warrants and Company will, if necessary to provide consideration to Investors, reprice the warrants. Any renegotiation or repricing will be made giving due consideration to the bid price of the common stock of Company. 4. Law. This Agreement shall be governed by and construed in accordance with the laws of the state of California as if it were executed and performed completely within such state. 5. Integration. This Agreement constitutes the entire understanding and agreement between the parties relating to the subject matter hereof and supersedes and cancels any prior written or oral understanding or agreement between the parties relating to the subject matter hereof. This Agreement shall not be amended, altered or supplemented in any way except by an instrument in writing, signed by the duly authorized representative of the parties. 6. Assignment. The rights or obligations of the parties hereby may not be assigned or delegated in any way without the written consent of the other party. 7. Severability. If any provision or term of this Agreement is held to be invalid, void, or unenforceable the remainder of the provisions shall remain in full force and effect and shall not be affected, impaired, or invalidated. IN WITNESS WHEREOF the parties have executed this Agreement by their duly authorized signatories as of the day and year first written above. SGI International, Inc. By: Michael L. Rose Title: CEO/President INVESTOR: By: By: Name: EX-4.5 6 FORM OF AMENDED NOTE EXT. & WAIVER OF INT. AGR. This Amended Extension and Waiver of Interest Agreement (the "Agreement") is made effective as of ____________, by and between SGI International, a Utah Corporation ("SGI" or the "Company") and_________________________ ("Investor"). RECITALS A. SGI has issued a number of promissory notes to Investor with such notes (the "Notes") being dated as of January 14, 1999, January 27, 1999,February 18, 1999, and March 10, 1999 with all of such notes being due and payable either in cash or in registered stock on March 26, 1999; and, B. Company and Investor previously extended the due dates on the Notes to May 27, 1999, and desire to further extend the due date of such Notes to and including June 27, 1999, all on the same terms and conditions, except that payment of all principal and interest will now be on June 27, 1999 and in return for issuing certain warrants to Investor all interest through June 27, 1999 will be waived. AGREEMENT NOW THEREFORE, in consideration of the covenants and conditions of this Agreement the parties do hereby agree as follows: 1. Extension. SGI and Investor hereby agree that in consideration of the premises contained herein and for other good and valuable consideration the Notes are hereby each and severally amended with the due date for all principal on each of such Notes being hereby amended and extended to and including June 27, 1999. All interest due on the Notes through June 27, 1999 is hereby specifically waived in return for the issuance of certain warrants to _________ in the form attached hereto as Exhibits A. 2. Term and Amendment. This Agreement supercedes prior agreements relating to its subject matter and shall amend only the due date of the Notes and the amount of interest due through June 27, 1999 and all other terms and conditions contained in each of the Notes shall continue in full force and effect, including interest at the rate set forth in the Note. IN WITNESS WHEREOF the parties have executed this Agreement by their duly authorized signatories as of the day and year first written above. SGI International, Inc. By: By:____________________________ Name: Michael L. Rose Name: Title: President/COO Title: EX-10.1 7 FORM OF COMPENSATION AGREEMENT DTD. 03/01/99 This Compensation Agreement (the "Agreement") is entered into this 1st day of March, 1999 (the "Effective Date"), by and between SGI International ("SGI") and _______________ ("______"). _______ shall be referred to as a Finder. RECITALS A. Finder has located potential investors ("Investor") who may be a source of capital for operating costs and/or investments into projects of SGI. The parties hereto intend to provide Finder with compensation in the event that investments are made on terms acceptable to both SGI and said Investor. B. Finder will disclose the name of said Investors and make known to said Investors information on SGI and its projects (the "Projects"), which are hereby defined to include without limitation the purchase of the ENCOAL Demonstration Plant and potentially the purchase of equity of SGI. All disclosures to Investor shall be made in confidence pursuant to a confidentiality agreement mutually acceptable to SGI and Investor and made as soon as reasonably possible after the execution of this Agreement. AGREEMENT NOW, THEREFORE, in consideration of the premises, covenants and conditions contained herein and for other good and valuable consideration and based on the parties intent as described in the Recitals the parties hereby agree as follows: 1. Engagement and Term. SGI hereby engages Finder to locate and disclose to Investor information relative to SGI and its potential Projects. Finder shall also disclose the name of Investors to SGI within a period of two months after the Effective Date. This engagement shall be for a period commencing on the Effective Date and terminating on March 1, 1999. 2. Coordination and Assistance. Finder shall make the disclosures described herein and coordinate any conversations and information exchange between SGI and Investor. 3. Compensation. If Investor makes an equity purchase or makes a capital investment in SGI (the "Investment") whether in SGI or in one of its Projects, then Finder will be compensated by providing Finder with five percent (5%) of the amount of any stock which will have "piggyback" registration rights. 4. Authority of Finder. Finder shall have the limited authority described herein to represent SGI and no other authority of any kind. However, SGI shall have the sole discretion to determine any final terms and conditions on which Investor shall make any Investment and shall have the sole right and authority to refuse any such Investment if SGI determines in its sole discretion that such Investment is not in its best interests. In the event that SGI refuses such Investment no fee of any kind shall be due to Finder. 5. Post Term Transaction. The parties agree that if SGI enters into a transaction with Investor within a period six (6) months after the termination as described in Section 1 then the compensation described herein shall still be paid to Finder. 6. Indemnification. The Company agrees to indemnify and hold Finder harmless from and against any losses, claims, liabilities, damages and expenses (and actions in respect thereof) incurred, that result from actions taken or omitted to be taken (including any untrue statements made or any statements omitted to be made) by SGI, its agents or employees. The Company will not, however, be responsible for any such loss, claim, liability, damage or expense to the extent that results primarily from the negligence, recklessness or bad faith of Finder. 7. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the state of California. 8. Entire Agreement. This Agreement contains all of the understandings between SGI and Finder relating to its subject matter. This Agreement supersedes and cancels any prior understandings and agreements between the parties, whether relating to Investor, the Investment, or the Projects. 9. Modification. This Agreement shall not be altered, modified, amended, or changed in any way whatsoever, except by a writing signed by all parties hereto. 10. Assignment. This Agreement shall not be assignable by any of the parties hereto without the specific written consent of all other parties, which consent shall not be unreasonably withheld. 11. Finder's Indemnity. If Finder becomes entitled to any compensation in accordance with this Agreement then Finder shall indemnify SGI against any claim by any other persons, finders, firms or brokers for commissions, finders' fees, or similar compensation in connection with any transaction between SGI and Investor or an affiliate of Investor. IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of the Effective Date. SGI International, a Utah corporation By:_________________________ Name:_______________________ Title:______________________ EX-27.1 8 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from SGI International's Form 10-QSB for the quarter ended June 30, 1999 and is qualified in its entirely by reference to such financial statements. 1 0 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1.000 343,809 402,500 838,451 79,460 63,121 1,636,440 1,703,036 1,129,056 4,641,254 7,696,296 0 376,549 635 48,543,265 (52,100,491) 4,641,254 1,451,484 1,482,373 914,837 914,837 3,293,805 0 312,348 (3,038,617) 0 (3,038,617) 0 0 0 (3,038,617) (0.10) (0.10)
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