PART I
ITEM 1: BUSINESS
SGI International's principal business is developing and marketing
energy technologies. The Company developed the patented Liquids From
Coal Process ("LFC Process"), which upgrades low-rank coal into a higher
Btu coal called process derived fuel ("PDF"), produces a hydrocarbon
liquid called Coal Derived Liquid ("CDL" ) and concurrently produces coal
gas, a non-condensable gas, that is used for process heating. SGI is
marketing the LFC technology both in the United States and internationally
through the TEK-KOL Partnership ("TEK-KOL"). SGI is also developing the
Opti-Crude Enhancement Technology ("OCET Process"), which is designed to
deasphalt the residue ("Resid") from oil refining. In 1995, SGI acquired
Assembly & Manufacturing Systems, Inc. ("AMS"), a system integrator of
automated assembly equipment marketed to large, established biomedical,
automotive, electronics, and computer companies in the United States.
The LFC Process. The LFC Process upgrades low-rank coal, and produces
CDL, which has characteristics similar to No. 6 fuel oil. There are
environmental and economic reasons for upgrading subituminous and lignite
coal. Foremost among these reasons is the need to accommodate the
increasing use of coal for electric power generation, while simultaneously
meeting national and international goals for environmental protection.
The LFC Process is a drying/partial pyrolysis technology, which uses
low-rank coal as a feedstock. Depending upon processing parameters,
the mild pyrolysis step of the LFC Process removes water and over sixty
percent of the volatile matter from the low-rank coal.
The major element of the pyrolysis mass balance is PDF. Depending upon
feedstock coal moisture and volatile matter, over one-half of each ton of
coal processed becomes PDF, and about 10% of each ton ends up as CDL, with
the remainder as water vapor or non-condensable gas.
The Company believes four key factors in the LFC Process differentiate
it from other coal cleaning, liquefaction, or gasification technologies.
First, the process simultaneously produces solids, liquids and gas. Second,
the control system regulates the coal heating rate and temperature level to
control the governing kinetics of gasification and stabilization reactions.
Third, the PDF is stabilized and does not self-ignite. Fourth, for the
purpose of controlling the gasification conditions (to obtain the desired
co-products), computer models of coal reaction kinetics, sensors, and
servo-mechanisms have been incorporated into the control system.
Low rank coal is characterized by a high-water content and low-heat value.
The high water content increases shipping cost per Btu and the low heat
value reduces boiler efficiency. The Company estimates the transportation
cost component of the delivered price of coal to be three to five times the
cost of the coal at the mine. SGI expects that proposed LFC plants should
reduce the per Btu transportation cost of coal by removing water and increasing
the Btu content of the coal. PDF contains approximately 11,500 Btu's per
pound, and is therefore a high grade fuel. The sulfur in PDF is stabilized to
reduce pollution when it is subsequently burned as fuel. Therefore, the
company believes PDF should be able to compete against low sulfur high-grade
or bituminous coal.
The TEK-KOL Partnership. The LFC Process is owned by the TEK-KOL
Partnership. TEK-KOL was formed in 1989 by the Company and Shell Mining
Company ("SMC" recently renamed as "Blue Grass Coal Development Company")
to further develop and commercialize the LFC Process. In 1992, all of the
assets of SMC were purchased by Zeigler Coal Holding Company ("Zeigler"),
one of the largest coal producing companies in the United States.
In 1989, ENCOAL Corporation ("ENCOAL"), a Blue Grass Coal Development
Company ("Blue Grass") subsidiary, and the U.S. Department of Energy ("DOE")
jointly committed up to $72.6 million under the U.S. government's Clean Coal
Technology Program for the construction and two-year operation of a 1,000
ton per day capacity "Clean Coal Demonstration Plant" using the LFC Process.
The plant is owned by ENCOAL and located at the Buckskin Mine near Gillette,
Wyoming. The construction and start-up phases were completed in 1992. In
June 1994, the plant completed a two year testing and demonstration program
and commenced production of PDF and CDL. In October 1994, ENCOAL and the
DOE agreed to co-fund $18 million for two additional years of plant operation,
commencing in September 1994. 75,000 tons of PDF have been shipped to five
major U.S. utilities for testing as a fuel for the production of electric
power and more than 3,800,000 gallons of CDL have been delivered to seven
industrial users and one steel mill. Additionally, the company believes
laboratory characteristics of CDL and process development efforts have shown
that CDL can be upgraded into significantly higher value chemical feedstocks
and transportation fuels. During 1996, the continued operation of ENCOAL's
Plant has provided important LFC Process design data and engineering
parameters, which support TEK-KOL's marketing of LFC plants to potential
project sponsors, equipment suppliers, and financing sources in the Pacific
Rim, the United States, and Europe.
During 1996, the Company and TEK-KOL made significant progress in further
developing aspects of and in marketing the LFC Process. In conjunction
with Mitsubishi Heavy Industries ("Mitsubishi" or "MHI"), comprehensive
engineering plans, designs and economic analyses have been prepared for a
future LFC plant to be built in the Powder River Basin in the United States.
Those engineering plans, designs, and economic analyses have then been
adapted for proposed projects in Indonesia, and may be adapted for proposed
projects in Russia, China, Australia and other locations. TEK-KOL, in concert
with Mitsubishi, is marketing the LFC Process for future LFC plants in
Indonesia and in other areas of the Pacific Rim.
LFC plants will need to be substantially funded by third parties, including
licensees, affiliated entities, institutional lenders, trading companies,
and joint ventures, which may include coal producers and users as participants.
TEK-KOL has previously issued licenses to a unit of Zeigler for the ENCOAL
Demonstration Plant and for Ziegler's first commercial plant.
Under the terms of the TEK-KOL Partnership Agreement "fully operational" is
defined as the ENCOAL LFC plant meeting design criteria (90% availability
for three (3) consecutive months). As a result of the ENCOAL Plant becoming
operational and the Partnership Agreement being amended, the distribution of
certain cash receipts from TEK-KOL is now set at 75% to SGI and 25% to Blue
Grass, until SGI receives $2,000,000. Thereafter, distributable Partnership
income, except for the payment for services will be distributed equally to
both partners.
The above described TEK-KOL Partnership terms do not fully describe the various
related contractual agreements between Blue Grass and SGI, all of which are on
file with the Securities and Exchange Commission. The agreements may also be
examined during business hours at the Company's corporate offices in La Jolla,
California.
LFC and CDL Markets
Domestic Markets. A marketing study completed for TEK-KOL indicates that
there is a current unsatisfied demand for PDF, which the Company believes
should increase significantly in the U.S. by the year 2000 because of the Clean
Air Act and amendments thereto. The U.S. Clean Air Act requires significant
reductions in Sulfur Dioxide (SO2) in Nitrous Oxide (NOx) by the year 2000,
thereby creating a challenge for industry and energy suppliers, which the
Company believes is a great opportunity for marketing PDF.
Potential purchasers of PDF are utilities, who could burn PDF in boilers for
the production of electricity and steel manufacturers who could burn PDF in
place of coke in state of the art steel manufacturing facilities. For PDF
to be used as a reductant for direct iron ore reduction it must meet steel
manufacturer's criteria, that total carbon must be at least 75%, residual
volatile matter must not exceed 15%, and total sulfur must not exceed 1%.
An even lower sulfur content, on the order of .03%, is desirable. Testing at
the Gillette, Wyoming LFC Demonstration Plant has shown that slightly more
severe LFC processing enables the PDF to meet the above carbon and volatile
matter specifications.
The company believes that CDL can be sold as a residual fuel oil in Asian
markets at a price of between $16-20 a barrel, which is sufficient with the
higher price of PDF in the same markets to provide an acceptable return on
equity. However, in the United States the price of residual fuel oil is
relatively low in comparison to Asian prices. Because certain of the
chemical components of CDL have significantly greater value as chemical
feedstocks, TEK-KOL has determined that the best method to maximize profits
would be to further refine the CDL into Cresylic acid feedstocks, heavy gas
oils, coal tar pitch and oxygenates.
Cresylic acid is used as a feedstock to produce phenols, ortho-cresols, meta
and para cresols, xylenol, and other products, which have applications for a
host of products, including resins, adhesives, insectisides, plasticizers, fuel
additives, pharmaceuticals, flavors, fragrances, and other items. The gas oil
can be used directly by a refinery to produce gasoline and kerosine. Coal tar
pitch potentially can be used for electrode binders, roofing, roads and
specialty materials. The oxygenates can be refined into catechols. TEK-KOL
is presently working on further refining CDL to maximize the return on these
subcomponent products.
The Company believes most promising areas for developing LFC Plants in the U.S.
are the subituminous coal deposits in the Powder River Basin (the "PRB"). Close
behind are the lignites in North Dakota, and in Texas, near San Antonio.
Testing of these coals by the TEK-KOL Development Center Sample Production Unit
shows that they can be economically upgraded by the LFC process.
Coals from the central and eastern U.S. are not good candidates for the LFC
Process. These coals are more costly to mine than western subituminous
coals, leaving less margin for upgrading. Further, while the LFC Process
is very effective at removing organic sulfur, these coals when burned in a
utility boiler still have too much metallic sulfur after processing to meet
the Clean Air Act requirements.
Powder River Basin. The Department of Energy's Energy Information
Adminstration 1997 report notes that a large portion of the extensive U.S. coal
reserves lie in the PRB of Montana and Wyoming. Subituminous and low in
sulfur, the Company believes this coal is ideal for processing by the LFC
Technology. The southern end of the PRB in Wyoming has very low sulfur and low
ash coal. PDF from this region may have an increased value for metallurgical
applications or as a super compliance low SO2 blending material.
A Phase II technical and economic feasibility study was completed on one
potential PRB site in 1996. This study was for a commercial-size LFC Plant
to be located at Triton Coal Company's North Rochelle Mine site. The proposed
project includes three 5,000 metric tons feed coal per day LFC modules, a 240
MW cogeneration plant, and CDL upgrading facilities integrated with the mine-
site infrastructure. The results of the study showed that the project had
an adequate return on total capital employed. As a consequence of the study
a unit of Ziegler filed an application for an Air Quality Permit with
the State of Wyoming in November of 1996, and applications for Land Quality and
Industrial Siting Permits were filed in early January 1997. The Industrial
Siting Permit was issued in February. Mitsubishi International and a
subsidiary of Zeigler executed an Engineering, Procurement, and Construction
Agreement on December 30, 1996, for the construction of a 15,000 metric tons
per day of coal feedstock, $460 million LFC Plant.
North Dakota. Significant reserves of lignite are present in the Williston
Basin of North Dakota. Tests of some of these coals have indicated that they
are good candidates for being upgraded by the LFC Process. The coal seams are
relatively thick, and the sulfur and ash content low, although not as low as in
the PRB.
Texas. Numerous tests of Texas lignites have been conducted at the
Development Center. Some of the lignites have proved to be good candidates
for upgrading using the LFC Process. The two most likely potential
applications of the LFC Process in Texas would either be in exporting upgraded
Texas lignites or applying the LFC Process in place of an existing drying
process.
International Markets
The Asian Market. The developed areas of East Asia -- Japan, Taiwan, South
Korea, and Hong Kong -- currently import expensive high-grade bituminous coals.
The Company believes these imports can be replaced in many markets by upgraded
coal produced by LFC plants. Therefore, TEK-KOL is focusing its Pacific Rim
marketing efforts on Indonesia, Russia, as well as China and countries which
have large reserves of low-grade coal. Laboratory testing by SGI and TEK-KOL
indicates that some of this coal can be upgraded.
Indonesia. Approximately 93% of Indonesia's reported 36+ billion metric tons
of reserves are in the form of subituminous and lignite coal. Approximately
70% of the reserves are located on the island of Sumatra and the other 30% on
the island of Kalimantan. The vast majority of the mines are open-cut
operations with thick seams. Most are located near the coast or close to a
navigable river with access to international as well as domestic markets.
Indonesia's rapid economic growth during the past decade has fueled an increase
in the demand for electric power that has grown at a rate of 11-15% per year.
Although Indonesia has been a major exporter of oil, as a result of the surging
domestic growth and its limited oil reserves, it is expected to become a net
importer of petroleum by the year 2000. Thus, the Company believes a
significant portion of the coal production should be directed to feeding
growing domestic electric power and industrial needs. Indonesia also requires
foreign exchange credits necessary to grow its economy. Consequently, the
Company believes it is under strong pressure to exploit its vast reserves of
subituminous and lignite coal in the export market.
TEK-KOL has been developing relationships and marketing the LFC Technology in
Indonesia for over 5 years. The coal industry is dominated by P.T. Tambang
Batubara Bukit Asam ("PTBA"), the state coal mining corporation which operates
under the Ministry of Mines and Energy. The structure of the industry,
includes state owned mines operated by PTBA, national and private companies
operating pursuant to coal concession contracts with PTBA, and a few local
area coal cooperatives.
The Company believes using the LFC Process to upgrade low-rank Indonesian coal
would permit it to become competitive in the steam coal export markets of
Japan, South Korea, Taiwan and Hong Kong. Since much of the Indonesian coal
deposits are low in sulfur, the resulting PDF also should be particularly
attractive to markets in Japan.
For the above reasons TEK-KOL is working with Mitsubishi and other Japanese
firms in the development of LFC projects in Indonesia as well as other parts of
Asia. TEK-KOL is attempting to develop several LFC plants in Indonesia. Two
comprehensive feasibility or Phase II studies have been completed in Indonesia
jointly with the respective owners of two separate coal mines. One of the
studies was completed with the government-owned coal company, PTBA, relative to
their coal mine in the Tanjung Enim area of South Sumatra. PTBA received a
$200,000 grant from the U.S. Trade and Development Agency to be paid to SGI
for one-half of SGI's costs in preparing a feasibility study for this area.
That comprehensive feasibility study indicates that the project has both
technical viability and an attractive rate of return. Based on the results of
the study the parties have entered into an agreement to accomplish those
additional tasks necessary to obtaining financing for an LFC Plant at this
location. The other completed comprehensive feasibility study was performed
in conjunction with a private mining concessionaire for a proposed project in
the Musi Rawas region of South Sumatra. That study indicates that an LFC
Plant at that particular location is technically feasible, but that its
economic attractiveness is dependent on the coal cost FOB LFC Plant.
Discussions are ongoing to determine whether a reasonable cost for the coal
can be obtained to make the project sufficiently attractive to continue its
development. Additional Phase I Preliminary Technical Feasibility Study
Reports have been completed on fifteen coal samples from four mining areas in
Indonesia. Two new Phase I Preliminary Technical Feasibility Studies are
underway for two private companies in Indonesia. Additional Indonesian
opportunities are being analyzed by TEK-KOL.
Russia. TEK-KOL has entered into negotiations for a Phase II Technical
Feasibility Study on Karakanskii coal from the Kuzbass region (Siberia) of
Russia. Several private and regional government entities are involved. A
preliminary economic evaluation indicates that the project appears economically
viable. A combination of Russian private and regional governmental agencies
will pay $150,000 for their portion of the study cost. Due to the lack of hard
currency in Russia, the involvement of Mitsubishi or some similar company will
likely be necessary for there to be any likelihood of an LFC plant being built
there.
Japan. Japan is the largest importer of coal in the world, accounting for 30%
of the world's seaborne-traded coal. The Company expects continued growth in
Japan's imports of steam coal. To provide an entry into Asian coal markets,
TEK-KOL is working to develop strategic relationships with Japanese coal and
oil importers, equipment suppliers, and financial institutions that are
evaluating possible participation in the development of LFC plants. TEK-KOL
has entered into an agreement effective February 8, 1996, with Mitsubishi,
which will assist in marketing LFC plants. The agreement provides MHI with an
option to obtain an exclusive to set its own scope of supply for providing
equipment and services to LFC plants developed on the Pacific Rim. MHI can
exercise this option at any time up to January 1, 1998. If MHI exercises its
option to set its own scope of supply it will pay TEK-KOL $500,000 every six
months during a four year term of the exclusive. Either MHI or TEK-KOL can
terminate the exclusive by giving written notice. The agreement also provided
that MHI would assist TEK-KOL in completing engineering for a Powder River
Basin LFC plant and then adapt that engineering to specific international
projects. The engineering for Zeigler's North Rochelle LFC Plant has been
completed and has been adopted for two seperate Indonesian projects. Mitsui
SRC Development Company also entered into an agreement with TEK-KOL in 1996
to assist in developing a marketing study for PDF and CDL for the Japanese
Market. That study shows that PDF can be sold at attractive prices in Japan
in both the steaming coal utility market and the Pulverized Coal Infection
(PCI) steel making market. Mitsui and Mitsubishi have also agreed to assist
in developing technology and methods for upgrading CDL in order to increase
the value derived from CDL sales.
China. Management believes that China represents a marketing opportunity for
programs to upgrade low-rank coal reserves for export and possible domestic
use. Proposed LFC plants in China could export upgraded coal to Japan, South
Korea, Taiwan and other industrialized areas of East Asia. Specifically, SGI
as the agent for TEK-KOL, has previously signed six Letters of Intent with coal
officials in five provinces of China to proceed with evaluation and development
of LFC plants in Shandong, Liaoning, the Yunan Province, and the Inner Mongolia
Autonomous Area. TEK-KOL intends to meet with a number of the parties in late
1997, in China and attempt to negotiate agreements to perform Phase II studies
relative to some of these projects. Phase I Preliminary Technical feasibility
studies have been completed on coals from three mining areas. There are
several potential candidates that TEK-KOL intends to pursue for further
development in 1997. The near term opportunities are: The Longkou Mine in
Shandong Province; Ehalainuoer Mine in Inner Mongolia Autonomous Region; and
the Shengli Open-Pit Mine in Inner Mongolia. The Shengli Mine is expected to
open before 2000 and its mining costs should be very low because of the low
stripping ratios and modern mining methods.
China is the largest producer as well as the largest coal consumer in the
world. Over one-third of Chinese coal production is located in the three
northern provinces of Shanxi, Shaanxi and Inner Mongolia. However, due to
significant transportation and infrastructure problems, it is not always
possible to move coal within China to meet local needs. As a result of the
extremely high economic growth in the southern and eastern coastal regions of
China accompanied by a parallel demand for new electric power, there are
predictions that China may require imports of coal in the range of 10-50
million tons per year by 2010.
For these reasons, China is viewed as one of the prime candidates for the
application of the LFC Technology. The Company believes the LFC Technology
offers China the opportunity: (a) to more efficiently and effectively employ
its vast resources of coal; (b) to conserve scarce and valuable railroad assets
as a result of the moisture reduction aspect of the LFC Technology; (c) to
vastly expand its exports into the world steam coal and metallurgical markets,
and to generate needed foreign revenue; (d) to augment valuable and
increasingly scarce petroleum assets through the production of CDL; and,
finally (e) to reduce the extremely severe pollution problems associated with
burning high sulfur coal.
Australia. TEK-KOL is reevaluating the potential for the application of the
LFC Process in Australia. There appear to be opportunities in the Western area
of Australia and TEK-KOL is beginning an analysis of those potential coal
reserves to determine the technical and economic feasibility of the application
of the LFC Process to them.
Competition. Factors which management believes may affect TEK-KOL's ability
to successfully market LFC plants, include the availability and cost of
delivered coal, the difference in cost between alternative fuels and coal,
regulatory efforts to reduce acid rain and other pollution, regulatory
incentives to increase utilization of clean coal based energy sources, and the
reliability and cost effectiveness of the LFC Process relative to other
competing technologies. PDF competes only against other coals. Since the only
electric market for coal are the utilities that own coal fired power plants.
PDF in general competes on a Btu content against other coals. However, since
PDF also has certain environmental benefits it will likely command a
competitive advantage.
The U.S. Clean Air Act, including Amendments thereto, requires reductions in
pollution, thereby creating a challange for industry and energy suppliers,
which the Company believes is an opportunity for marketing PDF. Demand fueled
by the imposition of emission constraints by the Clean Air Act, will increase
for low and medium sulfur coals. Phase I of the Act, which became effective
on January 1, 1995, requires that 261 coal-fired generators reduce emissions
of sulfur dioxide to about 2.5 pounds per MMBtu of fuel input. Beginning on
January 1, 2000, Phase II imposes a permanent cap on sulfur dioxide emissions,
at an average of 1.2 pounds per MMBtu for all generating units built before
1990. The Clean Air Act provides five options for bringing coal-fired units
into compliance: (1) retroffitting with flue gas desulfurization equipment; (2)
boiler repowering with new technologies that emit less sulfur dioxide; (3)
transfer or purchase of emissions allowance; (4) reduction of plant
utilization; and, (5) full or partial switching to lower sulfur fuel. Because
of these factors the Company believes that PDF should be a preferred fuel
compared to bituminious coal and other low sulfur coals.
The LFC Process, as applied to low-rank coal, competes with other thermal
processes. Such thermal processes consist of drying, forming, or coating.
Unlike the LFC Process, which produces solid and liquid co-products, all
competing processes produce only an upgraded solid product.
Only one of the competitive thermal processes is being developed by a large
company, Western Energy, which is a subsidiary of Montana Power. A brief
description of thermal process technologies that compete with the LFC
Process and their perceived advantages and disadvantages follows:
K-Fuels. The K-Fuels Process is a batch process in which coal is injected
into a vessel and brought above drying temperature at relatively high pressure,
400o C and 50 bars respectively. The solid material contains softened tar at
this elevated temperature. Solids are removed from the vessel and extruded
into pellets. The product is then cooled and conveyed into a storage bin.
K-Fuels claims that the product will be upgraded from 7,500 Btu/lb at 30%
moisture to 12,500 Btu/lb with no moisture. Broad claims of reduced NOx low
ash, and maximum boiler efficiency have been made by K-Fuels.
SGI Management believes the principal advantages of the K-Fuels Process are
that it qualifies for the Section 29(c) tax credit and produces a very high
Btu solid product. Section 29(c) of the Internal Revenue Code provides a tax
credit that today approximates $1.00, for each MMBTU of feedstock. Management
believes that the disadvantages of the K-Fuels Process are that it has high
technical risk (process has not been demonstrated on a large scale), and the
performance of the product has never been substantiated.
Puron Process. The Puron Process was initially developed by Food Machinery
Corporation ("FMC") to coke coal. This coking process is sequential. The
coal is dried and then devolatized. The Puron Process produces a product with
volatile matter of about 20% -- similar to the LFC Process PDF. The Puron
Process collects the heavy liquids and uses them as a binder for the production
of briquettes. The briquettes are then cooled to produce Puron's final
product. Heat for the process will be produced by burning approximately 10%
of the feed stock. The solid product contains approximately 13,000 Btu/lb and
less than 15% moisture.
SGI Management believes the advantages of the Puron Process are that it
qualifies for the Section 29(c) tax credit, it produces a high Btu solid
product, and its capital and operating costs are similar to the LFC Process.
Management believes that the disadvantages of the Puron Process are that it
has high technical risks, the process has not been demonstrated, and no
shipping, handling or test burns have been made.
Carbontec Process. The Carbontec Process is a thermal process producing a
low moisture (8-10%), high Btu (11,000 Btu/lb) product. It is a low-
temperature, low-pressure process containing three steps. The coal is first
dried (deep fried) in oil. Second, the coal is reheated to recover oil. The
final step is a cooling step.
The Company believes that the advantages of the Carbontec Process are that it
is a low temperature, low pressure process. The Company further believes that
the disadvantages of the process are that it is in an initial phase of
development, and appears to have high operating costs. It uses coal
combustion for a heat source.
Western Energy. Western Energy's Synfuels Process, like the LFC Process being
demonstrated at the ENCOAL LFC plant, is a DOE-sponsored project, whose funding
began more than a year prior to the ENCOAL project. The Synfuels Process uses
a series of vibrating fluidized beds to dry, mildly pyrolyze and cool the solid
product. The heat source for this process is natural gas, and pyrolysis gas is
only combusted to mitigate air emissions. The process produces solid products
in two size ranges, one high-Btu ultra fine solid product, and a second high-
Btu fines product. Product quality is estimated at approximately 10,500 Btu's
per pound, with 12% moisture content.
SGI Management believes that the advantages of the Western Energy Process are
that it qualifies for the Section 29(c) tax credit. The plant's capital cost
is the lowest of all processes. It is a low temperature and low pressure
process. Management believes that the disadvantages of the process are that
it requires a plant, with multiple trains of equipment, with very high
operating cost. The product is unstable and attempts to stabilize it decreases
Btu content.
Operations and Affiliates. U.S. Clean Coal Refineries, Inc. (USCCRI), a
wholly owned Delaware Corporation, OCET Corporation, a wholly owned Delaware
Corporation, SGI Australia Pty. Ltd. and AMS are subsidiaries.
OCET Process
Background. Refineries produce liquid fuels and lubricants from crude oil,
leaving a tarry byproduct called petroleum residuum, or "Resid". Typically
25% to 30% of the crude oil processed at a refinery ends up as Resid, totaling
some 20,000,000 barrels of Resid per day worldwide.
Resid is known to contain valuable oils and hydrocarbons suitable for reforming
into refinery products. Conventional processes such as vacuum distillation are
unable to recover the hydrocarbon fraction, which is locked in a complex
emulsion state formed by large asphaltene molecules and stabilized by resins.
Therefore, Resid is used to produce low-value products, such as heavy fuel oil
and paving materials.
Many refineries use high temperature processes to transform the Resid. For
example, coking is a severe thermal cracking process which transforms Resid
into hydrogen and methane gas, complex liquids, and a solid "petcoke". The
liquid fraction includes a range of unstable compounds which require expensive
treatment before further use in the refinery. Petcoke is difficult to use as
a fuel, due to its low content of volatile matter.
OCET Technology. The OCET Technology was designed to convert petroleum Resid
into two products: an uncracked liquid refinery feedstock, and a solid coal-
like fuel. By separating the higher grade hydrogen-bearing liquids from Resid,
the OCET Process recovers those hydrocarbon fractions that standard petroleum
refining processes either leave behind in the Resid, or degrade by cracking.
The process is designed to return a high-quality liquid feedstock to the
refinery, plus a solid with combustibility parameters superior to those of
coke.
The OCET Technology uses a solvent additive to destabilize Resid, followed by
electrochemical processing to separate the asphaltenes contained in the Resid.
In particular, the metal-bearing species are selectively deposited in the solid
fraction, thereby ensuring minimal contamination of the liquid product. The
resulting solid and liquid co-products are then separated by processes similar
to conventional refinery steps. Upon combustion of the solid fuel product, the
metals ultimately become a part of the harmless ash.
In contrast to solvent deasphalting processes, the OCET Process uses only a
small quantity of solvent to initiate destabilization. The OCET Technology may
be applied in lieu of, or as an adjunct to, solvent deasphalting, resulting in
higher yields of higher quality hydrocarbon liquids, while reducing the need
for coking or other hydrocarbon-degrading techniques.
The Company is currently testing Resid samples from petroleum sources around
the world at its research laboratory in San Diego. The Company and the U.S.
Department of Energy ("DOE") are in the process of negotiating a cooperative
research and development agreement to jointly analyze certain parameters of
the OCET Process. Since identifying the key control parameters necessary for
efficient control of the OCET Process, the Company has doubled the size of
its laboratory, increased the laboratory staff, procured new instrumentation,
and filed for patents. A patent application on the OCET Process was filed in
September 1994, and is pending. In light of recent laboratory developments,
a number of additional patent applications are being worked on to cover other
aspects and improvements to the OCET Process.
Markets and Competition. Markets for the OCET Process in the petroleum
industry are projected by Management to be numerous, both domestically and
internationally. Management believes that the OCET Process may significantly
improve refinery margins.
Alternative methods for disposal of Resid include high temperature processes,
solvent extraction processes, and catalytic processes. Typical of the high
temperature processes are coking and visbreaking. Coking involves complete
thermal degradation of the Resid with the production of a solid coke product
and liquids. In visbreaking, the Resid is raised to its cracking temperature
for a sufficient time to reduce the viscosity of the material by partial
decomposition of the hydrocarbons. While coking yields a degraded refinery
feedstock in the form of coker liquids, visbreaking produces heavy fuel oil as
its end product.
Solvent-based deasphalting processes, developed as an alternative to coking,
generally use liquid propane or butane as solvents. Due to high solvent
cost, the solvent must be recovered with high efficiency, with consequent
expense and complication. In addition, solvent processes generally draw
metallic contaminants from the asphaltenes into the liquid product. Such
contaminants preclude the use of catalytic processes to upgrade the liquid.
The yield from solvent processes is thus limited to a fraction of the
available hydrocarbons in Resid, so as to minimize the metal contamination.
Hydrocracking is a catalytic treatment converting Resid in the presence of
excess hydrogen and catalysts, to a gas-oil product. As with a solvent
processes, however, catalysts are extremely sensitive to minute quantities
of metallic contamination, limiting the range of feed materials.
Commercialization. The Company intends to demonstrate and commercialize the
OCET Process as expeditiously as possible. There appear to be niche
opportunities where the Company can provide significant added value to certain
refineries. The Company intends to enter into joint ventures with the owners
of such refineries in order to obtain an equity interest in OCET plants at such
refineries. SGI is in the process of identifying as many of such opportunities
as it can. The Company then intends to license its technology to other owners
or operators of crude oil refineries based on the value added to the refinery,
by the use of the process. The Company also intends to market the process as
an adjunct and means to improve the efficiency of certain competing processes,
both as to new systems and as to systems installed and in operation. This
approach could greatly increase a competing technology's cost effectiveness
and breadth of application. Management thus views such competitors as
potential customers in commercializing the OCET Technology.
The Company believes that the OCET Process may also have commercial
applications in addition to, and substantially different from, the proposed
initial application to petroleum Resid. Such alternative applications are
being explored and will be commercialized when feasible.
Forward-looking Statements. The projections, estimates and opinions of
management contained herein relative to the LFC and OCET Processes, and
relative to the business of the Company are forward looking statements and
statements of managements's belief. There can be no assurance that these
projections, results or events will not differ materially from those discussed
herein. Further, until agreements are actually executed, LFC plants actually
begin construction, the OCET Process is actually commercialized, and operating
revenues are actually earned, there can be no assurance that such events will
occur. The Company undertakes no obligation to publicly release the results of
any revisions to these forward-looking statements, which are made herein to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Assembly & Manufacturing Systems, Inc.
Background. AMS designs and manufactures factory automation equipment for
the medical, electronics, automotive and connector markets. Over 80% of AMS
customers are well financed companies, most of which are on the Fortune 500
list. The others are medium and smaller companies that are introducing new
technology in their respective areas. AMS products include:
Automatic-power and free pallet based systems
Robotics assembly cells for mechanical and electrical products
Conveyor systems with flexible automation
Rotary dial assembly systems
Precision link conveyor systems
Vision systems for inspection and measurement
AMS has a dedicated team of engineers (mechanical, electrical, and software)
and tool and die technicians that design, build and assemble sophisticated
automated assembly equipment. In addition AMS installs and services equipment
on the customer's premises.
AMS's strength in Project Management is one of the key reasons for projects
being on time and on budget. AMS's list of customer letters of recommendation
grows with each machine shipped. AMS strives to build high quality, low risk,
innovative systems that satisfy customer requirements. AMS has a history of
creating innovative solutions to satisfy a customer's assembly machine
requirements. These solutions are based on initial machine concepts,
specifications, systems experience, knowledge of the state of the art
technology, and creative engineering.
AMS uses many standard components, which the Company believes offers the latest
proven technologies. AMS does this to minimize project risk. Reduced risk
translates into better margins and ultimately a stable base of revenues.
The AMS Market. The market for automation equipment is projected to be $2.1
billion dollars in 1997 representing an annual growth of 9.5% over the previous
$2 billion in 1996. All indications are that the market for automation
equipment will grow for the foreseeable future. Industry estimates by Assembly
Magazine continue to show a market of over $3 billion in total by the year
2000.
Competition. Some of the more well known competitors are: Kunz Automation in
California, Welcdun Inc. in Michigan, Remmele Automation in Minnesota, Lanco in
Germany, and Ismecca in California. AMS continues to improve its position
against the competition as its reputation grows in the market place.
ITEM 2. PROPERTIES
The Company leases 5,500 square feet of office space at 1200 Prospect Street,
Suite 325, La Jolla, California 92037, pursuant to a lease which expires in
December 2000. AMS leases 20,000 square feet of office and manufacturing space
at 2222 Shasta Way, Simi Valley, California 93065, pursuant to a lease which
expires in October 1997. The Company leases 5,080 square feet of laboratory
space at 11588-20 and 21 Sorrento Valley Road, San Diego, California 92121,
pursuant to a lease which expires in May 2000. The combined monthly rental
rate on leased properties is approximately $31,000.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, various claims are asserted against the
Company and its subsidiaries. However, except for a cross complaint asserted
in a lawsuit filed by the Company for Declaratory Relief, no claims asserted
against the Company have resulted in litigation. Management's opinion is that
the ultimate resolution of any and all claims, including the cross complaint
against the Company, will not have a material effect on the Company's financial
position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the three months ended December 31, 1996 to
a vote of the shareholders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Except as otherwise indicated, all information contained in this filing has
been adjusted to give effect to a 1-for-20 reduction of the outstanding SGI
common shares which became effective March 22, 1995.
The Common Stock of the Company is currently traded and prices are quoted on
the NASD OTC Bulletin Board under the symbol SGII. The following table sets
forth the high and low bid prices for SGI Common Stock during the periods
indicated. The prices represent bid quotations and do not include retail
mark-ups, mark-downs or fees, nor do they necessarily represent actual trades.
High Low
1995
First Quarter $ 25.60 $ 3.75
Second Quarter 4.94 0.93
Third Quarter 1.78 0.78
Fourth Quarter 1.28 0.59
1996
First Quarter $ 3.44 $ 0.63
Second Quarter 13.00 2.25
Third Quarter 6.00 3.50
Fourth Quarter 7.88 3.88
As of December 31, 1996, the Company had approximately 2,200 stockholders of
record, and believes it has beneficial owners in excess of that number.
The Company has not declared any cash dividends on the Common Stock and does
not currently intend to pay any cash dividends on the Common Stock in the
foreseeable future.
The Company had the following sales of unregistered securities during the three
year period ended December 31, 1996. The price at which the securities were
sold was based on a discount to the then current bid price. The discount
percentages noted below are calculated based on the closing bid price on the
transaction date, which could be higher or lower than the bid price at the time
of sale. Therefore, the discount percentages noted below do not represent
actual discount percentages in the Company's transactions.
The following table provides information relative to the Company's 1994 common
stock sales to foreign accredited investors pursuant to Regulation S of the
Securities Act of 1993, as amended ("Reg. S"):
<TABLE>
<CAPTION>
Date Shares Proceeds Discount Fee Placement Agent
- -------- ------ --------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C>
02/10/94 5,000 $ 180,000 $ 76,250 $ 14,000 Bentley Richards
03/07/94 5,250 200,000 101,875 11,250 Tarpen Research
03/22/94 5,000 200,000 62,500 14,000 Bentley Richards
05/03/94 5,556 200,000 50,000 14,000 Bentley Richards
05/12/94 5,500 206,800 47,575 22,748 Swartz Investments
05/16/94 5,000 175,000 43,750 12,250 Bentley Richards
06/08/94 7,500 300,000 56,250 30,000 Swartz Investments
07/22/94 15,000 300,000 139,500 33,000 Swartz Investments
07/28/94 6,500 130,000 89,375 14,300 Swartz Investments
07/29/94 23,000 460,000 373,750 47,793 Swartz Investments
08/18/94 7,500 150,000 46,875 16,500 Swartz Investments
09/14/94 5,000 90,000 35,000 9,900 Swartz Investments
09/17/94 12,500 225,000 103,125 24,750 Swartz Investments
09/26/94 25,000 350,000 181,250 35,000 Bentley Richards
09/28/94 11,750 164,500 70,500 18,095 Swartz Investments
09/29/94 30,000 420,000 161,202 43,393 Swartz Investments
09/30/94 2,500 35,000 16,563 3,850 Swartz Investments
10/28/94 17,500 245,000 126,000 35,694 Swartz Investments
11/01/94 3,750 52,500 10,781 5,250 Mohawk Mgmt.
-------- ---------- ---------- ---------
198,806 $4,083,800 $1,792,121 $ 405,773
======== ========== ========== =========
</TABLE>
An owner/employee of Swartz Investments ("Swartz") also received warrants to
purchase 14,425 common shares at exercise prices ranging from $20.00 to $47.50
per share. Bentley Richards also received a warrant to purchase 1,250 common
shares at an exercise price of $25.00 per share. The warrants were issued
pursuant to Regulation D of the Securities Act of 1933, as amended ("Reg. D"),
were immediately exercisable, and expire through December 1999.
During 1994 and early 1995, the Company sold Investment Units ("Units") for
$10,100 to accredited investors pursuant to Reg. D. Each Unit consisted of one
$10,000 note payable and one convertible preferred share. Each preferred
share was convertible two years from issuance without further payment into
common shares. Rhodes Securities acted as the placement agent for certain of
the Unit investments and received $224,296 as compensation. Details of these
transactions are noted below.
During March and April 1994, the Company raised $30,300 through Series 94A-24
Unit sales consisting of 10% notes payable and three preferred shares
convertible into 75 common shares. During February to July 1994, the Company
raised $1,800,325 through Series 94A-36 Unit sales consisting of 12% notes
payable and 178.25 preferred shares convertible into 8,022 common shares.
During August 1994 to January 1995, the Company raised $1,775,580 through
Series 94-B Unit sales consisting of 12% notes payable and 175.8 preferred
shares convertible into 7,032 common shares.
During August to November 1994, the Company raised $185,000 through the sale of
12% Series 94-C notes payable with a face value of $200,000. These securities
were sold to accredited investors pursuant to Reg. D.
As provided in related service agreements, the Company granted warrants to
purchase 34,038 common shares to thirty two employees and consultants during
1994 pursuant to Reg. D. Generally, the warrant exercise prices were not
lower than the closing bid price on the grant date. The warrants were
immediately exercisable at exercise prices ranging from $0.20 to $50.00 per
share, and expire through December 31, 1999. Also in 1994, the Company
reduced the exercise prices of previously granted warrants held by twenty two
employees to purchase 80,703 common shares to $15.00 per share (market price)
from exercise prices ranging from $20.00 to $54.00 per share.
The following table provides information relative to the Company's 1995 common
stock sales to foreign accredited investors pursuant to Reg. S:
<TABLE>
<CAPTION>
Date Shares Proceeds Discount Fee Placement Agent
- -------- ------- ---------- ---------- --------- ---------------
<S> <C> <C> <C> <C> <C>
02/14/95 30,000 $ 300,000 $ 243,750 $ 30,000 Mohawk Mgmt.
05/03/95 100,000 149,809 200,191 15,000 Tarpen Research Corp
05/17/95 290,000 294,330 690,925 97,850 Leo From
07/17/95 100,000 63,728 54,972 - None
09/07/95 100,000 72,988 39,512 - Goldis Financial
09/13/95 100,000 126,688 4,562 - Goldis Financial
12/14/95 50,000 24,033 10,342 - Goldis Financial
------- ---------- ---------- ---------
770,000 $1,031,576 $1,244,254 $ 142,850
======= ========== ========== =========
</TABLE>
The following table provides information relative to the Company's 1995
preferred stock sales to foreign accredited investors pursuant to Reg. S.
All of these preferred shares were converted without further payment into
common shares during 1995 and 1996. The number of common shares into which
a preferred share converted was generally determined by dividing the preferred
share purchase price by the lesser of: 1) $18 per share or 2) 75% of the
five-day average common stock price; but never less than $8.00 per common
share.
<TABLE>
Preferred Common Placement
Date Shares Shares Proceeds Discount Fees Agent
- -------- ------- ------ ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
01/13/95 25,000 28,146 $ 250,000 $ 365,134 $ 27,500 Swartz
01/16/95 15,000 15,748 150,000 174,792 16,500 Swartz
01/18/95 10,000 11,090 100,000 121,804 11,000 Mohawk Mgmt.
01/18/95 20,000 23,663 200,000 273,264 22,000 Swartz
01/19/95 5,000 5,819 50,000 62,735 5,500 Swartz
01/20/95 50,000 63,650 500,000 722,080 55,000 Swartz
------- ------- ---------- ---------- ---------
125,000 148,116 $1,250,000 $1,719,810 $ 137,500
======= ======= ========== ========== =========
</TABLE>
An owner/employee of Swartz also received a warrant to purchase 2,500 common
shares at an exercise price of $18.00 per share. The warrant was issued
pursuant to Reg. D, was immediately exercisable, and expires December 1999.
During May 1995 to January 1996, the Company issued 10% notes payable
aggregating $354,000 to a domestic entity controlled by a Board member.
The notes payable were issued pursuant to Reg. D, and the principal and
accrued interest were converted into 283,200 common shares in March 1996.
In June 1995, the Company issued 100,000 common shares pursuant to Reg. S
to a foreign entity for services rendered.
In August 1995, the Company offered its Unit investors the following
alternatives relative to the notes payable and interest:
Alternative A The issuance of one Series 95R Preferred Share
("Share") and a warrant to purchase 2,000 common shares at $1.25
per share in exchange for each $10,000 Promissory Note ("PN"),
including accrued interest. The Share will have a liquidation
preference of $10,000, and will be convertible on November 1,
1997 into common stock with a bid-based market value of $18,000.
The warrant may be exercised at any time and will expire December
31, 1999.
Alternative B The issuance of one Share, a warrant to purchase
1,500 common shares at $1.25 per share, and four quarterly
payments of $250 in exchange for each $10,000 PN, including
accrued interest. The Share will have a liquidation preference of
$10,000, and will be convertible on November 1, 1997 into common
stock with a bid-based market value of $16,500. The warrant may
be exercised at any time and will expire December 31, 1999.
Alternative C The issuance of one Share in exchange for each
$10,000 PN, including accrued interest. The Share will have a
liquidation preference of $10,000, and will be convertible on
November 1, 1997 into 13,500 common shares.
Alternative D The issuance of one Share and four quarterly
payments of $250 in exchange for each $10,000 PN, including
accrued interest. The Share will have a liquidation preference
of $10,000, and will be convertible on November 1, 1997 into
12,500 common shares.
Alternative E Extension of the PN due date to September 30,
1997; payment of interest from April 1, 1995 to September 30,
1996 with restricted common shares to be issued in October 1995;
payment of interest for the twelve months ended September 30,
1997 with restricted common shares issued in October 1996. The
number of restricted common shares to be determined by dividing
the interest amount by 85% of the closing bid price on September
30, 1995 and 1996, respectively.
Alternative F Extension of the PN due date to September 30,
1997; payment of interest from April 1, 1995 to September 30,
1996 with restricted common shares to be issued in October 1995;
payment of interest for the twelve months ended September 30,
1997 quarterly in cash. The number of restricted common shares
to be determined by dividing the interest amount by 85% of the
closing bid price on September 30, 1995.
Alternative G Extension of the PN due date to September 30,
1997; payment of interest from April 1, 1995 to September 30,
1996 in cash on September 30, 1997; payment of interest for the
twelve months ended September 30, 1997 quarterly in cash.
This offering was made to accredited investors pursuant to Reg. D. From the
offering date through February 1996, the Company issued 156.25 Shares in
exchange for notes payable and accrued interest aggregating $1,684,012. The
Shares are convertible as described above, and 1,894,458 common shares are
reserved for conversion of these Shares at December 31, 1996. In addition, the
Company issued warrants to purchase 23,250 common shares at $1.25 per share.
The warrants were immediately exercisable and expire December 1999. Also
pursuant to this offering as described above, the Company issued 173,015
common shares in October 1995 for accrued interest and prepaid interest
aggregating $193,302. Also in October 1995, two domestic individuals at Rhodes
Securities were granted warrants to purchase 25,000 common shares at $1.25
per share as compensation for placement agent services provided in relation
to this offering. These warrants were issued pursuant to Reg. D, were
immediately exercisable, and expire in December 2000.
In August 1995, the Company issued a 10% note payable for $129,766 to the
owner of a domestic technical consulting firm pursuant to Reg. D in
satisfaction of a like amount of past-due invoices. The note payable,
accrued interest and additional accounts payable aggregating $141,603 were
satisfied in March 1996 through the issuance of a warrant to purchase 100,000
common shares at $1.72 per share. The warrant was issued pursuant to Reg. D,
was immediately exercisable, and was exercised in 1996.
In August and September 1995, the Company issued 10% notes payable
aggregating $230,000 and granted a warrant to purchase 230,000 common shares
at $1.00 per share to a domestic partnership pursuant to Reg. D. The note
principal was satisfied in June 1996 by the exercise of the warrant and the
cancellation of the note. The Company also issued 2,096 common shares
pursuant to Reg. D in June 96 to satisfy accrued interest on the notes of
$18,147.
In September and October 1995, the Company issued three preferred shares in
exchange for 100% of the outstanding common stock of AMS. These preferred
shares were issued to a domestic entity and a domestic individual pursuant to
Reg. D. and were originally convertible without further payment into 444,445
common shares two years from the issue date. In September 1996, the Company
redeemed one preferred share for $41,223 and the remaining preferred shares
are now convertible without further payment into 388,889 common shares.
In September 1995, the Company issued 20,000 common shares to a domestic
individual pursuant to Reg. D for services rendered.
During September to December 1995, the Company raised $182,901, net of
discounts aggregating $45,906, through the issuance of 193,035 common shares.
These securities were sold to three employees pursuant to Reg. D.
In October 1995, the Company raised $100,000 through the sale of a non-interest
bearing convertible debenture to a foreign corporation pursuant to Reg. D.
The debenture convertibility is contingent on future events, and the
debenture would have converted into 24,807 common shares at December 31,
1996 had those events occurred.
In November 1995, the Company issued 21,088 common shares to eight domestic
individuals pursuant to Reg. D for services rendered.
In December 1995, the Company granted a domestic individual a warrant to
purchase 25,000 common shares at $1.25 per share pursuant to Reg. D for
services rendered. The warrant was immediately exercisable and expires in
December 2000.
In January 1996, the Company issued 25,000 common shares to a domestic
individual pursuant to Reg. D for services rendered. Also in January 1996,
the Company issued 35,000 common shares to a domestic individual and 15,000
common shares to a foreign individual pursuant to Reg. D for services rendered.
As provided in related service agreements, the Company granted warrants to
purchase 1,455,404 common shares to fifty eight employees and consultants
during 1995 pursuant to Reg. D. The warrant exercise prices were not lower
than the closing bid price on the grant date. The warrants were immediately
exercisable, at exercise prices ranging from $0.875 to $20.00 per share,
and expire through December 31, 2000. Also in 1995, the Company reduced the
exercise prices of previously granted warrants held by fifty eight employees as
follows: warrants to purchase 87,796 common shares to $1.375 per share
(market price) from exercise prices ranging from $3.0625 to $15.00 per share;
warrants to purchase 4,199 common shares to $.875 per share (market price)
from $15.00 per share; warrants to purchase 1,152,284 common shares to $0.60
per share (market price) from exercise prices ranging from $0.875 to $20.00 per
share.
The following table provides information relative to the Company's 1996
common stock sales to foreign accredited investors pursuant to Reg. S:
<TABLE>
Date Shares Proceeds Discount Placement Agent
- -------- ------- ---------- ---------- ---------------
<S> <C> <C> <C> <C>
01/04/96 50,000 $ 24,231 $ 11,707 Goldis Financial
01/30/96 200,000 89,988 91,262 Goldis Financial
02/28/96 100,000 120,301 51,574 Goldis Financial
03/25/96 100,000 148,726 107,524 Goldis Financial
03/26/96 100,000 236,238 20,012 Goldis Financial
04/18/96 200,000 391,985 308,015 Goldis Financial
04/19/96 100,000 170,613 179,387 Goldis Financial
05/02/96 100,000 280,000 195,000 Goldis Financial
05/23/96 100,000 349,985 462,515 Goldis Financial
09/12/96 200,000 660,000 327,500 Goldis Financial
--------- ---------- ----------
1,250,000 $2,472,067 $1,754,496
========= ========== ==========
</TABLE>
During May to September 1996, the Company issued Goldis Financial ("Goldis")
11,250 common shares and a Goldis employee 26,250 common shares pursuant to
Reg. D as compensation for placement agent services. In March 1996, the
Goldis employee was also granted a warrant to purchase 20,000 common shares
at $1.72 per share pursuant to Reg. D as compensation for placement agent
services. In January 1997, the Company issued Goldis 11,250 common shares and
a Goldis employee 26,250 common shares pursuant to Reg. D as compensation for
placement agent services.
During January and February 1996, the Company raised $117,908, net of
discounts aggregating $67,131, through the issuance of 127,306 common shares.
These securities were sold to three employees pursuant to Reg. D.
During March and April 1996, the Company issued 70 Series 96-A preferred
shares to accredited investors pursuant to Reg. D in exchange for notes
payable and accrued interest aggregating $789,064. The Series 96-A preferred
shares are convertible without further payment into 945,000 common shares in
May 1998.
In April 1996, the Company issued 8,068 common shares to an accredited investor
pursuant to the alternatives offered to the Unit investors in 1995.
In May 1996, the Company issued 2,401 common shares to three domestic
individuals pursuant to Reg. D for services rendered.
In July 1996, the Company granted warrants to purchase an aggregate of
22,250 common shares at $4.375 per share to two domestic individuals as
compensation for services rendered. The warrants were issued
pursuant to Reg. D, were exercisable in September 1996, and expire December
2001.
In August 1996, the Company issued 35 Series 96-B preferred shares to
accredited investors pursuant to Reg. D. The Series 96B preferred shares are
convertible without further payment into 105,000 common shares in August 1998,
or upon the registration of the underlying common shares. The Company also
issued warrants to purchase 105,000 common shares at $5.75 per share to these
accredited investors pursuant to Reg. D. The warrants were exercisable on
October 31, 1996, and expire December 2000. The preferred shares and warrants
were issued in exchange for claims against future collections on notes held by
the Company.
In October 1996, the Company issued 14,288 common shares to accredited
investors pursuant to Reg. D for pre-payment of interest aggregating $62,200.
Also in October 1996, the Company issued 6,373 common shares to four domestic
individuals pursuant to Reg. D for services rendered.
Also in October 1996, the Company granted warrants for the purchase of
130,000 common shares at $5.87 per share to accredited investors pursuant
to Reg. D. The warrants were exercisable on November 30, 1996, expire November
30, 2006, and were issued in connection with the Company's early collection of
notes made by the individuals.
As provided in related service agreements, the Company granted warrants to
purchase 1,032,600 common shares to sixty five employees and consultants during
1996 pursuant to Reg. D. The warrant exercise prices were not lower than the
closing bid price on the grant date. The warrants were generally
exercisable after a 60 day period at exercise prices ranging from $1.60 to
$5.125 per share, and expire through December 31, 2001.
The Company executed a funding agreement with a foreign accredited investor
on April 14, 1997 which provides for the sale of the Company's common stock
in three tranches of $1,000,000 each pursuant to Reg. S. The number of shares
in each tranch will be determined by dividing the amount invested by the
product of 75% multiplied by the average of the closing bid price for the five
trading days preceeding the investment. Funding of the first tranch (365,924
common shares at $2.7328 per share) was due immediately upon execution of the
agreement. Funding of the second and third tranches are due within 60 days
and 120 days of April 14, 1997, respectively. The closing of the second and
third tranches is subject to certain minimum levels of price and trading volume
of the Company's common stock.
The Company executed a stock purchase agreement with a foreign accredited
investor on April 15, 1997 which provides for the sale of the Company's
common stock in five weekly tranches totaling $1,000,000 pursuant to Reg. S.
The number of shares in each tranch will be determined by dividing the amount
invested by the product of 75% mulitiplied by the average of the closing bid
price for the five trading days preceding the investment. The agreement
provides for a mimimum and maximum averge closing bid price for the five
trading days preceding the investment of $2.00 and $4.50, respectively.
Funding of the first tranch (75,250 common shares at $2.6578 per share) was due
immediatly upon execution of the agreement
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been derived from the audited
consolidated financial statements of the Company, certain of which appear
elsewhere in this Report together with the report of Ernst & Young, LLP,
independent auditors, whose report includes an explanatory paragraph
relating to an uncertainty concerning the Company's ability to continue as
a going concern. The selected financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Company's consolidated financial statements and notes
thereto.
<TABLE>
Years ended December 31,
<CAPTION>
1992 1993 1994
------------ ------------ ------------
Statement of Operations Data:
<S> <C> <C> <C>
Revenue $ 693,118 $ 809,910 $ 552,503
Net Loss (4,915,472) (6,116,388) (5,844,121)
Net Loss Per Share (3.14) (3.02) (3.02)
Weighted Average
Shares Outstanding 1,564,124 1,691,675 1,933,032
Balance Sheet Data:
Current Assets $ 1,727,940 $ 1,331,381 $ 717,406
Working Capital
Surplus (Deficit) 303,876 (917,979) (3,348,255)
Total Assests 10,886,581 9,240,338 8,198,362
Long Term Debt
(Excluding Current
Portion) 4,292,622 4,637,997 3,575,835
Stockholders'
Equity (Deficit) 4,889,895 2,350,981 556,866
Years ended December 31,
1995 1996
------------ ------------
Statement of Operations Data (continued):
<S> <C> <C>
Revenue $ 900,306(1) $ 4,244,268 (2)
Net Loss (6,824,940)(1) (4,259,365)(2)
Net Loss Per Share (2.46)(1) (0.80)(2)
Weighted Average Shares Outstanding 2,744,084 5,357,010
Balance Sheet Data:
Current Assests $ 944,910 $ 2,295,167
Working Capital Surplus (Deficit) (2,369,079) (4,015,187)
Total Assets 6,592,086 6,628,678
Long Term Debt (Excluding Current Portion) 4,631,250 123,750
Stockholders' Equity (Deficit) (1,629,578) 194,754
Note: No dividends have been declared since inception.
<FN>
<F1>
(1) The Company acquired AMS effective October 30, 1995. AMS recorded
revenue of $867,000 and income from operations of $238,000 for the
period October 31, 1995 through December 31, 1995.
<F2>
(2) AMS recorded revenue of $3,939,000 and income from operations of
$498,000 for the twelve months ended December 31, 1996.
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Projections and Estimates. The projections, estimates and opinions of
management contained herein relative to the LFC and OCET Processes and to the
business of Company are forward looking statements and statements of
management's belief; thus, there can be no assurance that these projections,
estimates, or opinions of management will ultimately be correct or that
actual results or events will not differ materially from those discussed
herein. Further, until agreements are actually executed, LFC plants actually
begin construction, the OCET Process is actually commercialized, and
operating revenues are actually earned, there can be no assurance that such
events will occur. The Company undertakes no obligation to publicly release
the results of any revisions to these forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Overview. In February 1996, TEK-KOL and MHI entered into an agreement
pursuant to which MHI agreed to pay TEK-KOL 3% of the value of equipment,
material and labor provided by MHI to the engineering and construction of LFC
plants. Management estimates that the total combined value subject to the
"scope-of-supply" payment will vary for each LFC plant. The agreement also
grants MHI an option to obtain a four-year, exclusive "scope of supply" for
LFC plants in the Pacific Rim. Upon exercise of the option, MHI will make
semi-annual payments of $500,000 to TEK-KOL over the exclusive period. The
option granted to MHI expires January 1, 1998, unless otherwise extended.
The option was previously set to expire on January 1, 1997, but was extended
to January 1, 1998, in return for certain services to be provided by MHI by
August of 1997. The entire agreement may be terminated by either party at
the end of a calendar year upon 90 days written notice.
Significant progress toward commercialization of the LFC Process occurred
late in 1996 and early in 1997. During November 1996 through January 1997,
a Zeigler subsidiary filed applications with the State of Wyoming for the
following permits: Air Quality, Land Quality, and Industrial Siting. The
Industrial Siting Permit was approved in February 1997. In December 1996,
Mitsubishi International and the Zeigler subsidiary executed a $460 million
Engineering, Procurement, and Construction Agreement providing for the
construction of an LFC plant in the PRB. The LFC plant processing capacity
will be 15,000 metric tons per day.
Several new OCET employees were added and the laboratory facilities were
substantially upgraded to assist in developing the OCET Process. Testing of
Resid samples from Venezuela, Mexico, and California is on-going.
Discussions with the DOE continue toward the execution of a cooperative
agreement relative to the OCET Process.
Revenues of $3,939,000 generated in 1996 by AMS's operations are well below
management's expectations. Accordingly, business development and marketing
personnel were recently added to evaluate new product lines and increase
revenues from existing activities.
As in prior years, the report of the Company's independent auditors for the
year ended December 31, 1996 contains an emphasis paragraph relating to an
uncertainty concerning the Company's ability to continue as a going concern.
As discussed in Liquidity and Capital Resources, the Company has short-term
and long-term liquidity deficiencies. The Company's ability to continue as
a going concern is primarily dependent upon successful financing of its
immediate working capital requirements and successful commercialization of the
LFC and OCET technologies. The Company intends to rectify the short-term
liquidity deficiency through equity sales. The Company intends to rectify
the long-term liquidity deficiency through equity sales, increased positive
cash flows from AMS's operations, and by commercialization of the LFC and OCET
technologies. If immediate working capital requirements are not successfully
financed and/or the LFC and OCET technologies cannot be successfully
commercialized, then the adverse impact on the business and operations of
the Company could be material.
The continued need to fund Company operations with equity based financing is
causing dilution. Management is committed to accelerating commercialization
of the LFC and OCET technologies and increasing cash flows from AMS's
operations, rather than obtaining funds through the sale of equity. However,
equity sales will be required in the short-term.
Results of Operations
The Company acquired AMS effective October 30, 1995. AMS recorded revenue
and income from operations of $3,939,000 and $498,000, respectively, during
the twelve months ended December 31, 1996. AMS recorded revenue and income
from operations of $867,000 and $238,000, respectively, for the period
subsequent to October 30, 1995. The following discussions do not include the
effect of AMS's operations.
Year ended December 31, 1996 compared to Year ended December 31, 1995. Other
income in 1996 increased 480% ($161,000) over 1995 as the Company recorded
the forgiveness of certain royalties payable aggregating $142,000. The
remainder of the increase is related to increased interest income derived
from the Company's cash balances during the year.
TEK-KOL's activities increased significantly in 1996; therefore, the Company's
share of the partnership's 1996 loss increased 61% ($175,000) over 1995.
Engineering, research and development expenses in 1996 decreased 58% ($935,000)
from 1995. Management curtailed certain engineering activities and TEK-KOL
assumed those responsibilities as well as all LFC Process marketing activities
which contributed to the decrease. Current year expenses relate primarily to
design of the OCET Process.
General and administrative expense in 1996 decreased 3% ($41,000) from 1995.
The 1996 expenses include non-recurring charges of $158,000 related to employee
warrant exercises with non-recourse notes. In 1995, the Company allocated
general and administrative expense of $651,000 to engineering, research and
development expense based on "LFC" employee hours worked. No such allocation
was made in 1996. After adjusting for non-recurring charges and expense
allocation differences, general and administrative expense decreased 14%
($170,000) from 1995.
Legal and accounting expense in 1996 increased 56% ($326,000) over 1995. The
1996 expenses include non-recurring charges of $316,000 related to employee
warrant exercises with non-recourse notes. After adjusting for the non-
recurring charges, legal and accounting expense increased 2% ($9,766).
Depreciation and amortization expense in 1996 decreased 73% ($1.6 million)
from 1995. Certain assets were written off in 1995 as discussed below;
depreciation expense decreased as no write-offs were made in 1996.
Interest expense is directly related to the amount of debt outstanding during
the period, the stated interest rate and note discounts, all as discussed in
Note 5 of Notes to the Consolidated Financial Statements.
The 1996 net loss decreased 40% ($2.8 million) from 1995. After adjusting for
non-recurring charges in 1996 and 1995, the loss related to comparative on-
going activities decreased 27% ($1.3 million) from 1995.
Year ended December 31, 1995 compared to Year ended December 31, 1994. The
Company's coal testing and analysis contract with the U.S. Department of
Energy was completed in June, 1995. The Company provided no contract
engineering services to ENCOAL during 1995; therefore, revenues declined in
1995 compared to 1994. Also, all deferred technology purchase payments were
received prior to 1995; therefore, no gain on sale of technology was recorded
in 1995. Interest income decreased in 1995 as the Company's average cash
balances were lower than in 1994.
Engineering and research and development expenses in 1995 decreased 38% ($1.2
million) from 1994. Management curtailed certain engineering activities and
TEK-KOL assumed those responsibilities as well as all LFC Process marketing
activities which contributed to the decrease.
General and administrative expense in 1995 increased 37% ($329,000) over 1994.
The 1995 expenses include non-recurring charges of $391,000 to reserve loans
to former officers, employees and consultants which may not be collectible.
The Company made loans to Owens, former CEO, over a period of years. Total
principal and accrued interest at the time of Owen's resignation totaled
$268,000, of which $224,000 was reserved as uncollectible and $44,000 was
offset against Company obligations to Owens. In January 1996, the Company
agreed to forgive the loans made to Owens in accordance with his employment
agreement and a settlement agreement. The remainder of the amount reserved
represents loans made by the Company to two consultants and certain employees.
The 1995 expenses also reflect non-recurring charges of $289,000 paid in stock
or warrants to purchase common stock. The transactions resulting in the 1995
non-recurring charges record commitments made by prior management. After
adjusting for these charges of $680,000, general and administrative expense
in 1995 decreased 39% ($351,000) from 1994.
Legal and accounting expense in 1995 increased 12% ($61,000) over 1994 due to
increased business activities and corporate restructuring aimed at streamlining
the Company's activities.
Depreciation and amortization expense in 1995 increased 127% ($1.2 million)
over 1994. Management evaluated the estimated net carrying value of certain
LFC process-related assets in September 1995 and recorded a write down.
Management revised the estimate in December 1995 and reversed a portion of the
write down. Accordingly, depreciation and amortization expense in 1995
includes a one time charge of approximately $1.0 million to reflect
Management's estimates.
Interest expense is directly related to the amount of debt outstanding during
the period, the stated interest rate and note discounts, all as discussed in
Note 5 of Notes to the Consolidated Financial Statements.
The 1995 net loss increased 18% ($1.1 million) over 1994. After adjusting for
non-recurring charges in 1995 and 1994, the loss related to comparative on-
going activities decreased 30% ($1.7 million) from 1994.
Liquidity and Capital Resources
The Company had short-term liquidity deficiencies at December 31, 1996 and
1995 of $4.0 million and $2.4 million, respectively. Current notes payable
and accrued interest of $4.7 million contribute to the Company's short-term
deficiency at December 31, 1996. Management intends to convert a portion of
the notes payable and accrued interest into equity or further extend the
September 30, 1997 due date on a portion of the notes payable. Negotiations
are on-going for the public and private placement of equity securities, the
proceeds of which will be used to satisfy the short-term liquidity deficiency.
The Company executed a funding agreement April 14, 1997 which provides for the
sale of the Company's common stock in three tranches of $1,000,000 each
pursuant to Reg. S. The number of shares in each tranch will be determined by
dividing the amount invested by the product of 75% mulitplied by the average of
the closing bid price for the five trading days preceding the investment.
Funding of the first tranch (365,924 common shares at $2.7328 per share) was
due immediately upon execution of the agreement. Funding of the second and
third tranches are due within 60 days and 120 days of April 14, 1997,
respecively. The closing of the second and third tranches is subject to
certain minimum levels of price and trading volume of the Company's common
stock. The Company executed a stock purchase agreement with a foreign
accredited investor on April 15, 1997 which provides for the sale of the
Company's common stock in five weekly tranches totaling $1,000,000 pursuant to
Reg. S. The number of shares in each tranch will be determined by dividing the
amount invested by the product of 75% multiplied by the average of the closing
bid price for the five trading days preceding the investment. The agreement
provides for a minimum and maximum average closing bid price for the five
trading days preceding the investment of $2.00 and $4.50 respectively. Funding
of the first tranch (75,250 common shares at $2.6578 per share) was due
immediatly upon execution of the agreement.
The Company had long-term liquidity deficiencies at December 31, 1996 and 1995.
The Company expects the long-term liquidity deficiency to be satisfied through
equity sales, increased positive cash flows from AMS's operations, and research
or other collaborative agreements, until such time as the commercialization of
the LFC and OCET Processes results in positive cash flows.
The Company's 1996 cash flows used for operating activities increased 32%
($904,000) over 1995. This increase is primarily attributable to increased
OCET operations in 1996. The Company's 1995 cash flows used for operating
activities decreased 36% ($1.6 million) from 1994. This decrease is
attributable to TEK-KOL's assuming LFC plant marketing activities. If future
financing activities are successful, the funds will be used for operating
expenditures; otherwise, certain operating expenditures will be curtailed.
The Company's financing activities raised approximately $3.5 million, $3.0
million and $7.5 million during 1996, 1995 and 1994 respectively. 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. Funds raised in 1995 decreased significantly
from 1994 due to unfavorable market conditions. The Company anticipates that
future financing activities will be influenced by the aforementioned factors.
Significant future financing activities will be required to fund future
operating and investing activities and to maintain debt service.
During 1996, 1995, and 1994, the Company invested approximately $0.8 million,
$0.2 million and $0.5 million, respectively, in additions to certain LFC
Process-related assets, other assets and a certificate of deposit. The amount
of funds used for investing activities in a given period is directly related
to development requirements and fund availability. The Company collected $1.7
million and $0.2 million on the LFC Process related notes receivable in 1996
and 1995, respectively. The Company agreed to return the notes to the makers
in exchange for the 1996 payments. No funds were collected in 1994 as the note
makers received no distributions from the Colstrip Project.
Additional capital contributions to the TEK-KOL Partnership are expected to be
required from time to time prior to profitable operations. The Company is
required to contribute one-half of any such required capital contributions.
The Company paid all required capital contributions to TEK-KOL through
December 31, 1996. Management believes that substantially all of the 1997
funding requirements for TEK-KOL will be paid by third parties with whom
TEK-KOL has, or will have, agreements. Management estimates that the Company
will be required to contribute approximately $800,000 in 1997 if none of
these agreements are consummated.
The Company does not have material commitments for capital expenditures as of
December 31, 1996.
Patents
A United States patent was issued in 1983 for certain steps in the LFC Process.
The existing U.S. LFC patent, which was assigned to TEK-KOL in 1989, will
expire in the year 2000. Management does not anticipate any material adverse
impact caused by the expiration of this patent. TEK-KOL has significant
technical expertise, trade secrets, and experience in comparison to the limited
impact of the expiration of the LFC Patent. Further, on December 1, 1995,
TEK-KOL applied for a patent covering broad improvements to the original LFC
patent, which was issued on February 11, 1997. This patent covers a process
for treating non-caking coal to form passivated char. Patent applications
related to this broad LFC patent were also filed on April 12, 1996 in Japan,
March 27, 1996 in Russia, May 8, 1996 in Uzbekistan, July 25, 1996 in
Kazakhstan, and July 25, 1996 in Indonesia. TEK-KOL has received a notice of
allowance of the patent from Russia in February 1997.
TEK-KOL has also received additional patents relating directly and indirectly
to other aspects of the LFC process. In December 1994, TEK-KOL received a U.S.
patent for a process to ignite a burner in an inert atmosphere. A patent
application related to this process was filed on November 29, 1995 in Japan.
On August 20, 1996, TEK-KOL received a U. S. patent for Pyrolysis Process Water
Disposition. On December 10, 1996, TEK-KOL received a U. S. patent for a
method and apparatus for removing particulate and gaseous pollutants from a gas
stream. Finally, a number of other related patents are pending before
various patent offices in the U.S. and abroad.
[FN]
<FN1>
PDF, CDL, and LFC are trademarks of TEK-KOL.
<FN/>
ITEM 8. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors 21
Consolidated Balance Sheets - December 31, 1996 and 1995 22-23
Consolidated Statements of Operations for the three years
ended December 31, 1996 24
Consolidated Statements of Stockholders' Equity (Deficit)
for the three years ended December 31, 1996 25
Consolidated Statements of Cash Flows for the three years
ended December 31, 1996 26
Notes to Consolidated Financial Statements 27-40
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
SGI International
We have audited the accompanying consolidated balance sheets of SGI
International as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SGI International
at December 31, 1996 and 1995, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996.
As discussed in Note 2 of the notes to consolidated financial statements, the
Company's principal assets are related to the LFC (Liquid From Coal) Process.
The recovery of these assets is dependent upon future events, including the
Company's ability to attract sufficient additional equity and/or financing
needed to fund its portion of the TEK-KOL Partnership, that is responsible for
completion and commercialization of the LFC Process. These factors and the
Company's working capital deficiency and recurring losses from
operations raise substantial doubt about its ability to continue as a going
concern. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
ERNST & YOUNG LLP
San Diego, California
March 20, 1997,
except to Note 11, as to which the date is
April 14, 1997
<TABLE>
SGI International
Consolidated Balance Sheets
December 31,
1996 1995
<S> ---------- ----------
Assets
Current assets: <C> <C>
Cash $ 704,018 $ 74,154
Time deposit 402,500 -
Receivable from joint venture partner 24,431 75,524
Trade accounts receivable, less
allowance for doubtful accounts of
$10,309 and $7,343 at December 31,
1996 and December 31, 1995,
respectively 888,254 341,352
Costs and estimated earnings in
excess of billings on uncompleted
contracts 113,130 271,448
Inventories 68,289 68,289
Prepaid expenses and other current
assets 58,545 114,143
---------- ----------
Total current assets 2,295,167 944,910
LFC Process related assets:
Notes receivable, net 304,903 1,123,948
Royalty rights, net 1,885,500 2,199,750
LFC cogeneration project, net 526,421 631,705
Investment in TEK-KOL Partnership 464,163 596,276
Australia LFC project, net 144,795 173,754
Other technological assets, net 27,742 26,440
Process demonstration equipment, net
of accumulated depreciation of
$608,592 at December 31,1995 - 153,781
---------- ----------
3,353,524 4,905,654
Property and equipment, net of
accumulated depreciation and
amortization of $345,995 and
$269,040 at December 31, 1996 and
1995, respectively 548,601 249,328
Other assets - 12,876
Goodwill, net 431,386 479,318
---------- ----------
$6,628,678 $6,592,086
========== ==========
See notes to consolidated financial statements.
</TABLE>
<TABLE>
SGI International
Consolidated Balance Sheets
December 31,
1996 1995
------------- -------------
<S> <C> <C>
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 444,436 $ 683,583
Borrowings on line-of-credit 300,000 -
Billings in excess of costs and estimated
earnings on uncompleted contracts 387,892 175,745
Current maturities of long-term notes payable 4,216,500 909,016
Notes payable to Director - 304,000
Accrued salaries, benefits and related taxes 124,942 279,103
Royalties payable to related party - 141,790
Payable to TEK-KOL Partnership 83,252 412,000
Interest payable 529,183 139,663
Other accrued expenses 224,149 269,089
------------- -------------
Total current liabilities 6,310,354 3,313,989
Interest payable - 276,425
Long-term notes payable, less current
maturities 123,750 4,631,250
Commitments
Stockholders' equity (deficit):
Convertible preferred stock, $.01 par
value; 20,000,000 shares authorized,
88,732 and 103,729 shares issued and
outstanding at December 31, 1996 and
1995, respectively 887 1,037
Common stock, no par value; 75,000,000
shares authorized, 6,094,605 and 3,859,671
shares issued and outstanding at December
31, 1996 and 1995, respectively 36,118,231 32,255,357
Paid-in capital 6,494,585 4,582,215
Accumulated deficit (42,419,129) (38,159,764)
Notes receivable from employees for warrant
exercises - (308,423)
----------------------------
Total stockholders' equity (deficit) 194,574 (1,629,578)
------------- -------------
$ 6,628,678 $ 6,592,086
============= =============
See notes to consolidated financial statements.
</TABLE>
<TABLE>
SGI International
Consolidated Statements of Operations
Years ended December 31,
1996 1994 1995
------ ------ ------
<S> <C> <C> <C>
Revenues:
Net sales $ 3,938,854 $ 866,676 $ -
Engineering services revenue
from related Party - - 123,117
Contract revenue - 8,722 -
Net gain from related party
for sale of technology - - 360,000
Other 305,414 24,908 69,386
----------------------------------------
4,244,268 900,306 552,503
Expenses:
Cost of sales 3,440,381 628,506 -
Engineering, research
and consulting 664,887 1,599,826 3,089,078
Loss on investment in TEK-KOL 462,613 288,000 -
Selling, general and
administrative 1,880,655 1,377,172 891,400
Legal and accounting 905,466 579,630 518,738
Depreciation and amortization 627,161 2,142,957 944,656
Interest 522,470 1,109,155 952,752
---------------------------------------------
8,503,633 7,725,246 6,396,624
---------------------------------------------
Net loss $(4,259,365) $(6,824,490) $(5,844,121)
=============================================
Net loss per share $ (0.80) $ (2.46) $ (3.02)
=============================================
Weighted average shares
outstanding 5,357,010 2,774,084 1,933,032
=============================================
See notes to consolidated financial statements.
</TABLE>
<TABLE>
SGI International
Consolidated Statements of Stockholders' Equity (Deficit)
Convertible
preferred stock Common Stock
--------------------------------------------
Shares Amount Shares Amount
--------------------------------------------
<S> <C> <C> <C> <C>
Balances at December 31, 1993 142,096 $1,421 1,833,427 $22,106,272
Issuance of common stock for
services - - 500 13,333
Issuance of warrants to purchase
common stock for services - - - -
Issuance of common stock at $14 to
$40 per share for cash, net - - 198,806 3,678,027
Exercise of warrants for cash - - 2,275 40,222
Issuance of convertible preferred
stock for cash 355 4 - -
Conversion of preferred stock (35,350) (354) 69,439 3,540,144
Net loss - - - -
--------------------------------------------
Balances at December 31, 1994 107,101 1,071 2,104,447 29,377,998
Issuance of common stock for
services and interest - - 389,103 482,166
Issuance of common stock at $.48
to $10 per share for cash, net - - 963,035 1,023,956
Exercise of warrants for cash
and notes - - 274,829 318,548
Issuance of convertible preferred
stock for cash, net 125,002 1,250 - -
Conversion of preferred stock (128,533) (1,286) 128,257 1,052,689
Issuance of convertible preferred stock
for notes payable and interest 156 2 - -
Issuance of convertible preferred
stock to acquire AMS, Inc. 3 - - -
Net loss - - - -
------------------------------------------
Balances at December 31, 1995 103,729 1,037 3,859,671 32,255,357
Issuance of common stock for notes
payable, services and interest - - 587,278 750,799
Issuance of common stock at $.45 to
$3.50 per share for cash, net - - 1,377,306 2,593,844
Exercise of warrants to purchase
common stock for cash and notes
payable - - 243,528 270,509
Issuance of convertible preferred
stock for notes payable and interest 105 1 - -
Conversion of preferred stock (15,101) (151) 26,822 247,722
Repurchase of preferred stock (1) - - -
Warrants granted for notes payable,
accounts payable and interst - - - -
Compensation expense for warrants
exercised with notes receivable - - - -
Collection of notes receivable - - - -
Net loss - - - -
-----------------------------------------
Balances at December 31, 1996 88,732 $ 887 6,094,605 $36,118,231
=========================================
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
Total
shareholders'
Paid-in Accumulated Notes equity
capital deficit receivable (deficit)
-----------------------------------------------
<S> <C> <C> <C> <C>
Balances at December 31, 1993 $ 5,733,991 $(25,490,703)$ - $ 2,350,981
Issuance of common
stock for services - - - 13,333
Issuances of warrants
to purchase common stock
for services 15,000 - - 15,000
Issuance of common stock at
$14 to 40 per share for
cash, net - - - 3,678,027
Exercise of warrants for cash - - - 40,222
Issuance of convertible
preferred stock for cash 303,420 - - 303,424
Conversion of preferred stock (3,539,790) - - -
Net loss - (5,844,121) - (5,844,121)
-----------------------------------------------
Balances at December 31, 1994 2,512,621 (31,334,824) - 566,866
Issuance of common stock for
services and interest - - - 482,166
Issuance of common stock at $.48
to $10 per share for cash, net - - - 1,023,956
Exercise of warrants for cash
and notes - - (308,423) 10,125
Issuance of convertible preferred
stock for cash, net 1,112,726 - - 1,113,976
Conversion of preferred stock (1,051,403) - - -
Issuance of convertible
preferred stock for notes
payble and interest 1,678,492 - - 1,678,494
Issuance of convertible preferred
stock to acquire AMS, Inc. 329,779 - - 329,779
Net loss - (6,824,940) - (6,824,940)
----------------------------------------------
Balances at December 31, 1995 4,582,215 (38,159,764) (308,423) (1,629,578)
Issuance of common stock for
notes payable, services
and interest - - - 750,799
Issuance of common stock at
$.45 to $3.50 per share for
cash, net - - - 2,593,844
Exercise of warrants to purchase
common stock for cash
and notes payable - - - 270,509
Issuance of convertible preferred
stock for notes payable
and interest 1,583,396 - - 1,583,397
Conversion of preferred stock (245,511) - - 2,060
Repurchase of preferred stock (41,223) - - (41,223)
Warrants granted for notes payable,
accounts payable and interest 141,603 - - 141,603
Compensation expense for warrants
exercised with notes receivable 474,105 - - 474,105
Collection of notes receivable - - 308,423 308,423
Net loss - (4,259,365) - (4,259,365)
----------------------------------------------
Balances at December 31, 1996 $6,494,585 $(42,419,129) $ - $ 194,574
==============================================
See notes to consolidated financial statements.
</TABLE>
<TABLE>
SGI International
Consolidated Statement of Cash Flows
Years ended December 31,
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Operating activities
Net loss $ (4,259,365) $(6,824,940) $(5,844,121)
Adjustments to reconcile net loss
to net cash flows used for
operating activities:
Depreciation and amortization 659,660 1,164,157 944,656
Write down and write off of LFC
related assets - 978,800 -
Write off of receivables from
officers and directors - 396,961 -
Amortization of note discounts - 269,064 271,715
Common stock and warrants issued
for services and interest 211,650 603,160 28,333
Compensation for warrants exercised
with notes receivable 474,105 - -
Changes in assets and liabilities:
Receivable from joint venture partner 51,093 (29,701) (16,262)
Trade accounts receivable (388,584) (59,162) -
Inventories - 500 -
Receivable from officers and directors - - (56,125)
Prepaid expenses and other current
assets 102,248 5,266 17,837
Accounts payable (239,147) (65,664) (7,384)
Billings in excess of costs and estimated
earnings on uncompleted contracts 212,147 77,188 -
Accrued salaries, benefits and related
taxes (154,161) 54,473 14,073
Royalty payable to related party (141,790) (88,064) 54,166
Contributions payable to TEK-KOL
Partnership (228,748) 412,000 -
Interest payable 113,095 247,044 169,044
Other accrued expenses (154,420) 20,849 553
-------------------------------------
Net cash flows used for operating
activities (3,742,217) (2,838,069) (4,423,515)
Investing activities:
Cash acquired from AMS - 21,184 -
Purchase time deposit (402,500) - -
LFC process related assets:
Collection of notes receivable
and related interest, net 1,717,258 117,235 -
Additions to other technological
assets (1,302) (33,183) (130,020)
Additions to process demonstration
equipment - (31,511) (72,729)
Investment in TEK-KOL 132,113 (184,000) -
Purchase of property and equipment (408,727) (45,469) (36,623)
Other assets 12,876 63,274 (223,158)
---------------------------------------
Net cash flows provided by (used for)
investing activities 1,049,718 (92,470) (462,530)
Financing activities:
Borrowings on line-of-credit 300,000 - -
Proceeds from issuance of notes
payable 50,000 830,362 3,467,580
Payment of notes payable (125,250) (525,025) (2,857,608)
Proceeds from issuance of convertible
preferred stock - 1,113,976 303,424
Redemption of preferred stock (41,223) - -
Proceeds from issuance of common
stock 3,174,836 1,034,081 3,718,249
--------------------------------------
Net cash flows provided by financing
activities 3,358,363 2,453,394 4,631,645
--------------------------------------
Net increase (decrease) in cash 665,864 (477,145) (254,400)
Cash at beginning of the year 74,154 551,299 805,699
--------------------------------------
Cash at end of the year $ 740,018 $ 74,154 $ 551,299
======================================
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 195,000 $ 294,000 $ 515,000
======================================
Supplemental disclosure of non-cash
activities:
Series 96 convertible preferred stock
issued for notes payable
and interest $1,583,000 $ - $ -
======================================
Series 95 convertible preferred
stock issued to acquire AMS $ - $ 330,000 $ -
======================================
Series 95 convertible preferred
stock issued for notes payable $ - $1,557,500 $ -
======================================
Warrants exercised in exchange
for notes payable $ 230,000 $ 308,000 $ -
======================================
Common stock or warrants issued
for notes payable, services
and interest $ 751,000 $ 482,000 $ 28,000
======================================
Conversion of preferred stock $ 246,000 $1,053,000 $3,540,000
======================================
See notes to consolidated financial statements.
</TABLE>
SGI International
Notes to Consolidated Financial Statements
December 31, 1996
1. Business, Organization and Principles of Consolidation
SGI International (the "Company") was organized in 1985 as the successor to
certain other businesses. Through 1994, the principal business of the
Company was to license the Liquids From Coal ("LFC") Process technology as
exclusive licensing agent for the TEK-KOL Partnership (TEK-KOL's information
is discussed in Note 4), to provide expert technical services to all LFC
Process related activities and projects and to develop Clean Coal Refineries
worldwide. During 1995, the Company commenced development of the OCET
(Opti-Crude Enhancement Technology) Process which is designed to increase
the ratio of high quality fuels refined from residual oil, and the Company
acquired a manufacturing business that fabricates and sells automated assembly
equipment. Since inception, the Company has financed its research and
development of the LFC and OCET processes by private placement of debt and
equity securities and to a lesser extent through research and development
contracts.
The Company has the following wholly owned subsidiaries at December 31, 1996:
Assembly & Manufacturing Systems, Inc. ("AMS"); OCET Corporation ("OCET"); U.S.
Clean Coal Refineries, Inc. ("USCCR"); and SGI Australia Pty. Ltd. ("SGIA").
AMS designs, manufactures, and installs automated assembly equipment, and was
acquired in October 1995 (Note 6). 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. SGIA was organized
in 1985 and became a wholly owned subsidiary in 1993. SGIA was established to
commercialize the LFC Process technology in Australia and New Zealand.
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions have been
eliminated in consolidation.
2. Significant Accounting Policies
Basis of Presentation. 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 related assets, is dependent upon
the Company's ability to adequately fund its capital contributions to TEK-KOL
and TEK-KOL's ability to successfully attract sufficient additional equity,
debt or other third-party financing to complete the commercialization of the
LFC Process technology.
Success in commercialization of the LFC 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 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 TEK-KOL or the Company. If the Company and
TEK-KOL are unsuccessful in their attempts to license the LFC 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 the LFC Process.
The Company had negative working capital of $4.0 million and an accumulated
deficit of $42.5 million at December 31, 1996. These conditions 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. 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 negotiations 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.
As discussed in Note 11, the Company raised $1,000,000 in April, 1997.
Estimates and Assumptions. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and disclosures made in the accompanying notes to the
consolidated financial statements. Actual results could differ from those
estimates.
Concentration of Credit Risk. The Company invests its excess cash in interest
bearing deposits with major banks, commercial paper and money market funds.
Although certain of the cash accounts may exceed the federally insured deposit
amount, management does not anticipate non-performance by the other parties.
Management reviews the stability of these institutions on a periodic basis.
Inventories. Inventories are valued at the lower of cost (first-in, first-
out) method or market.
Accounting for Long-Lived Assets. Effective January 1, 1996 the Company
adopted FASB Statement No. 121, "Accounting for Long-Lived Assets and Long-
Lived Assets to Be Disposed Of." The Company records impairment losses on
long-lived assets used in operations when events and circumstances indicate
that assets might be impaired and the undiscounted cash flow estimated to be
generated by those assets are less than the carrying amounts of those assets.
The LFC Process related assets and other long-lived assets are evaluated
continually by management for evidence of impairment. In performing its
evaluation management considers such factors as competing technologies,
current and future market potential for products generated from the LFC
Process technology, viability of projects or assets and progress of related
projects such as the Colstrip Project and the TEK-KOL Partnership. The
Company's estimate of undiscounted cash flows indicated that such carrying
amounts were expected to be recovered. This analysis is based upon the
successful development, construction and opertation of a commercial LFC Plant
as discussed in the second paragraph of this Note. It is reasonably possible
that the estimate of undiscounted cash flows may change in the near term
resulting in the need to write-down the LFC Process related assets to fair
value.
Depreciation and Amortization. Royalty rights, the LFC cogeneration project
and the Australian LFC project are stated at cost and are being amortized over
ten years. Process demonstration equipment is stated at cost and is being
depreciated over five years. Property and equipment is stated at cost and is
being amortized over three to five years. Goodwill related to the AMS
acquisition is being amortized over ten years. Depreciation and amortization
on the LFC Process related assets and other long-lived assets is calculated
using the straight-line method and the depreciation and amortization periods
are based on management's estimates of the useful lives of the respective
assets.
Revenue Recognition. Revenues from engineering and consulting services are
recorded as the services are performed and earned in accordance with the
contracts to perform such services. Revenues from manufacturing contracts are
recorded using the percentage-of-completion method of accounting, based upon
the ratio of costs incurred to total estimated costs. Estimated losses are
recorded in their entirety when loss contracts are identified. Contracts may
extend over one or more accounting periods, and revisions in estimated costs
and revenue recognition during the course of the work are reflected during
the accounting period in which the facts that require such revisions become
known. Other income consists primarily of interest income and is recorded as
earned.
Stock Based Compensation Awards. Management recommends and the Board of
Directors authorizes warrant grants to employees and other individuals on a
periodic basis. Warrant grants are not made pursuant to a qualified plan;
therefore, the warrants have a non-qualified tax status.
In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
the Company has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issue to Employees" ("APB 25") and related
interpretations in accounting for stock based compensation awards. Under
APB 25, if the exercise price of the Company's warrants equals or exceeds the
fair value of the underlying stock on the grant date, no compensation expense
is recorded. See Note 7 for pro forma disclosures required by SFAS 123.
Common Shares Issued for Services. The values assigned to the restricted
common shares issued for services are recorded at the estimated fair value of
the services rendered.
Income Taxes. Income taxes are provided for in accordance with the provisions
of SFAS No. 109. Under this method, the Company recognizes deferred tax assets
and liabilities for the expected future tax effects of temporary differences
between the carrying amounts of assets and liabilities used for financial
reporting and income tax purposes, as well as operating loss carryforwards.
Net Loss Per Share. Net loss per share is computed using the weighted average
number of common shares outstanding during the periods presented. Common stock
equivalents, consisting of convertible preferred stock and warrants to purchase
common stock, are excluded from the computation as their effect is anti-
dilutive.
Reclassification. Certain prior year balances have been reclassified to
conform to the current year presentation.
3. Balance Sheet Detail
As of December 31, 1996, billings to date of $5,366,000 exceeded costs incurred
and estimated earnings on contracts of $5,091,000 by $275,000. As
of December 31, 1995, costs and estimated earnings of $3,005,000 exceed
billings on contracts of $2,909,000 by $96,000. The amounts are
included in the accompanying balance sheets under the following captions:
<TABLE>
December 31,
----------------------------
1996 1995
----------------------------
<S> <C> <C>
Costs and estimated earnings in excess of
billings on contracts $ 113,130 $ 271,448
Billings in excess of costs and estimated
earnings on contracts (387,892) (175,745)
----------------------------
$ (274,762) $ 95,703
============================
</TABLE>
4. LFC Process Related Assets
Notes receivable. In June 1985, Montana One Partners ("MOP"), a California
limited partnership, was formed to develop an LFC-CoGen Plant in Colstrip,
Montana (the "Colstrip Project"). The Company was the sole general partner.
Originally, the limited partners purchased a 5.93% preferred interest in MOP
for $1,462,000; 84.07% was acquired by the Company and 10% by an affiliate,
AEM Corp.
Pursuant to agreements executed in 1988 (the Colstrip Sale Agreements), MOP
sold its interest in the Colstrip Project and the Company sold its interest in
certain other projects to four individuals who formed Rosebud Energy Corp.
("Rosebud"). The sales price of $6,769,000 included $3,500,000 of 8% notes
payable, liabilities aggregating $2,519,000 which were assumed by Rosebud and
liabilities of $750,000 which were forgiven. The basis of the assets sold was
$5,317,000. The Company recognized the immediate reduction of accounts payable
and deferred the remaining gain of $702,000. The notes were non-recourse,
and collectibility was contingent on profitable operations or future financing
of the Colstrip Project.
The transaction was recorded as a non monetary exchange, and because of the
contingencies on the note payments, no gain or interest income will be
recognized until the proceeds received are in excess of the basis of assets
sold.
By December 31, 1991, the Company had acquired the limited partners' 5.93%
preferred interest and AEM's 10% interest in MOP in exchange for cash
($727,000), contingent notes payable ($1,124,500) and warrants to purchase
28,688 common shares at $10 per share. The notes payable to former MOP
limited partners ("FLP") and AEM are payable only out of the Company's
collections on the contingent notes received from Rosebud.
As of December 31, 1995, the Company had received principal payments of
$375,000, interest payments of $739,000 and had written off notes receivable
with a face value of $425,000.
During August through October 1996, the Company entered into the following
agreements with the certain FLPs and the Rosebud individuals. The Company
offered to exchange a preferred share convertible into 3,000 restricted common
shares and a warrant to purchase 3,000 restricted common shares at $5.75 per
share for each FLP's contingent note payable. Approximately seventy-six
percent of the FLPs accepted this offer, and the Company issued 35 Series 96B
preferred shares convertible into 105,000 restricted common shares and warrants
to purchase 105,000 restricted common shares at $5.75 per share. The Rosebud
individuals paid the Company $1,525,000 in exchange for the notes held by the
Company from the 1988 Colstrip Project sale and the related accrued interest.
The Company combined these transactions for reporting purposes and recorded
$788,000 as the valuation of the securities issued to the FLPs.
The remaining balances of notes receivable and related accounts represent
amounts due from the 1988 sale of certain other projects and contingent
amounts payable to the remaining FLPs and AEM. The components of the net
carrying value of the notes receivable on the accompanying consolidated balance
sheets are as follows:
<TABLE>
December 31,
---------------------------
1996 1995
---------------------------
<S> <C> <C>
8% notes receivable $ 300,000 $ 2,700,000
Interest receivable 288,203 1,532,095
---------------------------
588,203 4,232,095
Deferred gain and interest income (202,193) (1,494,030)
8% notes contingently payable to FLP's and AEM (81,107) (1,614,117)
---------------------------
Net carrying value $ 304,903 $ 1,123,948
===========================
</TABLE>
Royalty Rights. LFC Technology Partners ("LFCTP") originally financed
research and development of the LFC Process technology under certain research
agreements entered into with the Company from 1982 to 1986. As provided under
the research agreements, LFCTP provided cash and issued notes to the Company
in exchange for all rights in the LFC Process technology. On October 1, 1987,
the Company and LFCTP entered into an Amended Technology Transfer Agreement
(the transfer agreement), which provided for the transfer of all rights in the
LFC Process technology to the Company in exchange for three levels of royalty
payments. The first level of royalty payments was satisfied during 1992.
In 1992, the Company and LFCTP entered into a Settlement Agreement which
provided for modifications of the second and third level royalty payments. In
exchange for 12,500 shares of Series 92-C convertible preferred stock, LFCTP's
third level royalty under the transfer agreement was reduced from 12.5% of the
Company's future net cash receipts (as defined) to zero and LFCTP's second
level royalty under the transfer agreement was reduced from approximately $9
million at December 1992 to $10,000 per month plus 25% of net cash receipts
generated by the Colstrip Project.
Royalty rights aggregating $3,142,500 were recorded in 1992 based upon the
value of the underlying common shares. Royalty expense will be recognized as
would have been required under the transfer agreement or evenly over 10 years,
whichever is greater. Amortization expense of $314,250 was recorded during
1996, 1995 and 1994, and accumulated amortization totals $1,257,000 and
$942,750 at December 31, 1996 and 1995, respectively.
Payment obligations under the reduced second level royalty terminated once the
common stock underlying the Series 92-C preferred stock was registered in
August 1994. LFCTP converted the 12,500 shares of Series 92-C preferred stock
into 62,500 common shares in September 1994.
LFC Cogeneration Project. The Company has substantially completed the design
and engineering of an LFC facility for use in conjunction with an electric
cogeneration plant. Amounts capitalized at December 31, 1996 relate primarily
to plans and drawings for the design of such a facility. Amortization expense
of $105,000 was recorded during 1996, 1995 and 1994, and accumulated
amortization totaled $526,000 and $421,000 at December 31, 1996 and 1995,
respectively.
Pursuant to the Colstrip Sale Agreements, the Company granted Rosebud a non-
exclusive license for LFC Process cogeneration plants with an aggregate
capacity of 350 megawatts which provides for SGI to receive royalties of up
to $1,000,000 from future plant financings and operations. The Company is
continuing its efforts to enter into additional licenses which utilize the LFC
Cogeneration technology.
Investment in TEK-KOL Partnership. The Company entered into a Technology
Purchase Agreement (the "Agreement") with Shell Mining Company (SMC) on
September 28, 1989. Under the Agreement, SMC acquired a one-half interest in
the LFC Process technology, related stand-alone assets and patents in exchange
for $650,000 in cash, a $550,000 note, and forgiveness of $350,000 of current
debt. SMC also agreed to pay additional consideration totaling $1,000,000 when
the first LFC plant became operational or $40,000 per month, up to an aggregate
of $1,000,000 beginning July, 1992. Because of the time period involved over
which the proceeds were collected, the Company recognized the revenue as the
consideration was received. During 1994, $360,000, the final increment of the
$1,000,000, was recognized as revenue.
The Company and SMC formed TEK-KOL on September 30, 1989, and each partner
contributed its respective one-half interest in the LFC Process technology,
related LFC stand-alone assets and patents to the partnership. TEK-KOL was
formed to own and license the LFC Process technology. The Company accounts for
its investment in TEK-KOL using the equity method. TEK-KOL was inactive
through December, 1994. TEK-KOL became operational in 1995 and the Company has
recorded $463,000 and $288,000, respectively, as its share of TEK-KOL's 1996
and 1995 net losses.
Capital contributions to TEK-KOL are expected to be required from time to time.
The partnership agreement requires the Company to contribute one-half of any
required capital contributions. The Company recorded a liability to TEK-KOL
of $412,000 at December 31, 1995 for the unpaid portion of the required
contributions. The partners verbally agreed that the Company was not in default
of the partnership agreement provision regarding payment of required capital
contributions. The Company paid all required capital contributions to TEK-KOL
through December 31, 1996. Management believes that substantially all of the
1997 funding requirements for TEK-KOL will be paid by third parties with whom
TEK-KOL has, or will have, agreements. Management estimates that the
Company will be required to contribute approximately $800,000 in 1997 if none
of these agreements are consummated.
The partnership agreement originally designated the Company as licensing
contractor. To date, the Company has not been reimbursed for past licensing
related expenditures. The partnership agreement was amended effective May 1,
1995 so that the Company now receives 75% of all royalties, fees, and other
monies paid to TEK-KOL by third parties, until such time that the Company has
received $2.0 million. After the Company receives $2.0 million, all royalties,
fees, and other monies paid to TEK-KOL will be shared evenly. Ongoing
licensing activities by the Company will be compensated as determined by
TEK-KOL. The Company will record licensing revenues as these monies are
received.
TEK-KOL granted the Company a royalty-free LFC Process license for cogeneration
plants with an aggregate capacity of 350 megawatts and a royalty-bearing LFC
Process license which requires the Company to pay royalties of approximately
12.5% of the net proceeds from the sale of liquids produced by its first two
sole LFC Projects. Royalties to TEK-KOL for all products produced by
additional SGI sole projects are subject to negotiation based on prevailing
industry practices.
TEK-KOL granted an LFC Process license to SMC through which TEK-KOL will
receive royalties of approximately 12.5% of the net proceeds from the sale of
liquids produced by the first Level I and Level II plants. Royalties to
TEK-KOL for all products produced by any subsequent SMC plants are subject to
royalties negotiated based on prevailing industry practices.
Australia LFC Project. The Company has capitalized certain costs associated
with preliminary site reviews and engineering studies relative to Australian
coals as part of an effort to market the LFC Process technology. The Company
owns the right to license the LFC Process technology in Australia and New
Zealand. The capitalized costs are being amortized over a ten year estimated
life and amortization expense of $29,000 was recorded during 1996, 1995 and
1994. Accumulated amortization at December 31, 1996 and 1995 is $145,000 and
$116,000, respectively.
5. Line-of-Credit and Notes Payable
The Company established a $400,000 line-of-credit with a financial institution
during 1996. The line-of-credit is secured by a $402,500 certificate of
deposit maturing May 1997, and borrowings on the line-of-credit bear interest
at two percent over the certificate of deposit interest rate. Borrowings on the
line-of-credit were $300,000 at December 31, 1996.
<TABLE>
Notes payable consist of the following:
December 31,
--------------------------
1996 1995
--------------------------
<S> <C> <C>
12% notes, due through September 2000, unsecured $ 33,250 $ 47,500
10-12% notes, due at various dates through
September 1997, unsecured 4,207,000 5,696,766
Non-interest bearing convertible debenture,
due no earlier than 1998, unsecured 100,000 100,000
--------------------------
4,340,250 5,844,266
Less current portion 4,216,500 1,213,016
--------------------------
$ 123,750 $ 4,631,250
==========================
</TABLE>
During 1986 and 1987, the Company sold securities to qualified investors
through private placement offerings which included 12% notes payable.
Principal payments of $2,375 and 12% interest payments are due quarterly
through maturity in September 2000. The 12% notes payable also include
contingent interest ranging from 6% to 24%. The contingent interest begins
accruing quarterly upon completion of construction, start-up and testing of a
commercial LFC Plant. No commercial LFC Plants have been built and no interest
expense related to this contingency has been recorded to date. The notes are
convertible into restricted common stock at the rate of .075 shares per $1 of
outstanding principal. Prepayment of the principal results in the payment of
an amount which would cause the annual return from the original note date to
become 18% to 24%, compounded annually. An additional payment equal to 25% of
the outstanding principal is also required upon prepayment. The balance
outstanding under these notes totaled $33,250 at December 31, 1996.
During 1995 and 1994, the Company sold Investment Units ("Units") through
private placement offerings to qualified investors for $10,100 per unit. Such
Units include a $10,000 note payable, bearing interest at rates of 10% to
12% per annum and one convertible preferred share. The notes payable generally
have twelve to thirty-six month terms and interest is payable quarterly. The
preferred shares are convertible into common stock as described in Note 7. The
proceeds from the Units were allocated to the notes payable and preferred
shares based on their relative fair values which resulted in recording
discounts to the notes payable. Note discounts of $269,000 and $272,000 were
amortized to interest expense during 1995 and 1994, respectively.
The Company made limited principal and interest payments in 1995 on the notes
payable issued through the Unit sales. In November 1995, the Company proposed
a note restructuring program to the noteholders pursuant to which the original
maturity date could be extended to September 1997, or the note principal could
convert into preferred stock. The notes payable were restructured during late
1995 and early 1996 as discussed below.
As of December 31, 1995, the original maturity dates for notes payable with
a carrying value of $4,034,000 were extended and notes payable with a carrying
value of $1,557,500 were converted into 155.75 Series 95R preferred shares with
a $10,000 per share liquidation preference. Of the preferred shares issued,
135.25 preferred shares are convertible into 1,806,875 common shares on
November 1, 1997 and 20.5 preferred shares are convertible into common shares
based on the November 1, 1997 common stock price. At December 31, 1996, these
preferred shares would have been convertible into 90,234 common shares based on
the closing bid price of $4.0312 per share. Certain of the converting
noteholders were granted warrants to purchase 39,250 shares of common stock at
$1.25 per share pursuant to terms of the restructuring.
In 1995, accrued interest of $121,000 was satisfied through the issuance of the
Series 95R preferred shares, accrued interest of $99,000 was satisfied through
the issuance of 8,838 restricted common shares, and accrued interest through
December 31, 1995 of $276,000 is due September 30, 1997. The Company also
prepaid interest to September 30,1996 of $94,000 on certain notes through the
issuance of 84,177 restricted commons shares.
During 1996, the original maturity dates for notes payable with a carrying
value of $165,000 were extended and notes payable with a carrying value of
$725,000 were converted into 2.5 Series 95R preferred shares and 70 Series 96A
preferred shares, all with a $10,000 per share liquidation preference. The
Series 95R preferred shares are convertible into 33,750 common shares on
November 1, 1997 and the Series 96A preferred shares are convertible into
945,000 common shares on May 1, 1998.
In 1996, accrued interest of $89,000 was satisfied through the issuance of the
Series 95R and 96A preferred shares, the Company prepaid interest to September
30, 1997 of $62,200 on certain notes through the issuance of 14,288 restricted
common shares, and accrued interest through December 31, 1996 of $529,000 is
due September 30, 1997.
In 1996, the Company granted the owner of a domestic research company a warrant
to purchase 100,000 restricted common shares at $1.72 per share in exchange for
a note payable previously issued by the Company, accrued interest and accounts
payable totaling $141,600.
The Company received $304,000 and $50,000 from an entity controlled by a
Director in 1995 and 1996, respectively, in exchange for 10% notes payable due
on December 31, 1996. In March 1996, the Company issued 283,200 restricted
common shares is satisfaction of the aggregate principal and accrued interest
of $375,000.
The Company received $230,000 from LFCTP in 1995 in exchange for 10% notes
payable due through 2000 and warrants to purchase 230,000 common shares at
$1.00 per share. The notes payable were collateralized by the notes receivable
discussed in Note 4. In 1996, LFCTP exercised the warrant in exchange for the
previously issued note payable and the Company issued 230,000 restricted common
shares. Accrued interest of $18,000 on the notes was satisfied through the
issuance of 2,096 restricted common shares.
The Company received $100,000 from a foreign corporation in 1995 in exchange
for a non-interest bearing debenture with a $100,000 face value. The debenture
is due one year from the occurrence of certain future events, none of which
occurred to date. Accordingly, the debenture is classified as long-term debt
in the accompanying balance sheets. The debenture is convertible based on
future events, and would have converted into 24,807 common shares at
December 31, 1996 had those events occurred.
Scheduled principal payments of notes payable are as follows:
<TABLE>
Years ended December 31,
- ------------------------
<S> <C>
1997 $ 4,216,500
1998 9,500
1999 109,500
2000 4,750
-----------
Total payments $ 4,340,250
===========
</TABLE>
6. Acquisition of AMS and Information on Industry Segments
On October 30, 1995, the Company acquired AMS, a designer and manufacturer of
automated assembly equipment. The Company issued three Series 95 convertible
preferred shares valued at $330,000 in exchange for 100% of the outstanding
common stock of AMS. The acquisition has been accounted for as a purchase and
resulting goodwill of $479,000 is being amortized over ten years.
The following table presents relevant information for AMS for the year ended
December 31, 1996 and the period October 31, 1995 to December 31, 1995.
<TABLE>
1996 1995
------ ------
<S> <C> <C>
Sales $ 3,939,000 $ 867,000
Income from operations 498,000 238,000
Total assets 1,527,000 1,297,000
Accum. Depreciation 34,000 1,000
</TABLE>
Sales revenue was derived primarily from contracts to manufacture assembly
equipment with four and two customers in 1996 and 1995, respectively. Revenue
from sales of automated assembly equipment accounted for 93% and 96% of the
Company's revenues in 1996 and 1995, respectively.
7. Stockholders' Equity (Deficit)
Convertible Preferred Stock. A summary of the issued and outstanding
convertible preferred stock at December 31, 1996 is as follows:
<TABLE>
Common shares
Shares issued Preference in issuable
and outstanding liquidation conversion
----------------------------------------------
<S> <C> <C> <C>
Series P-90 Preferred Stock 400 $ 40,000 100,000
Series PS90 Preferred Stock 8 2,000 1,000
Series 90 Preferred Stock 6 640 560
Series 91 Preferred Stock 87,655 346,440 7,520
Series 92 Preferred Stock 21 2,110 153
Series 93 Preferred Stock 79 7,850 2,888
Series 94 Preferred Stock 300 30,005 12,688
Series 95 Preferred Stock 158 1,913,611 2,292,748
Series 96 Preferred Stock 105 1,155,000 1,050,000
----------------------------------------
88,732 $ 3,497,656 3,467,557
========================================
</TABLE>
The Series 96 convertible preferred shares are non-voting, and were issued in
connection with the note restructuring discussed in Note 5 and the FLP
transaction discussed in Note 4. The Series 96B preferred shares have certain
registration rights, and are convertible without further payment on the earlier
to occur of the filing of a registration statement including the underlying
common shares or August 30, 1998.
The Series 95 convertible preferred shares are non-voting, and were issued in
connection with private placements, the note restructuring discussed in Note 5
and the AMS acquisition discussed in Note 6. In 1995, the Company raised
$1,114,000, net of offering costs of $137,500, through the issuance of 125,000
Series 95 convertible preferred shares and the issuance of two Series 94
convertible preferred shares. The Series 95 preferred shares were convertible
after forty one days into common shares based on the common stock closing bid
price on various dates in 1995. During 1996, 17,500 Series 95 preferred shares
were converted into 21,875 common shares, and during 1995, 107,500 Series 95
preferred shares were converted into 126,421 common shares.
The Series 94, 93, 92, 91 and 90 preferred shares were issued in connection
with the Unit sales discussed in Note 5. All Series 94 through 90 preferred
shares are non-voting, and callable at $100 per share except the Series 91
and Series 90 preferred shares.
Certain of the Series 91 convertible preferred shares provide cumulative
dividends ranging from $8 to $800 per share, and are callable at $100 per
preferred share plus any unpaid cumulative dividends.
The Series 90 preferred shares provide an $8 cumulative dividend per share,
and are callable at $100 per share plus any unpaid cumulative dividends.
The Series PS90 convertible preferred shares were issued in 1990 to employees
of the Company and are convertible into restricted common shares upon payment
of $1.375 per common share. The Series PS90 preferred shares are non-voting,
have a preference in liquidation of $250 per share and provide a $20 cumulative
dividend per share.
The Series P-90 convertible preferred shares were issued in 1990 to two Board
members who were also Company officers, and are convertible into restricted
common shares upon an additional payment of $1.375 per common share. The
Series P-90 preferred shares are non-voting, provide an $8 cumulative dividend
per share, and are callable after January 1, 1996 at $100 per share plus any
unpaid cumulative dividends.
Dividends on all preferred shares are only payable when the Company has
sufficient accumulated earnings. Cumulative dividends of $87,000 were in
arrears under the Series 91, PS90, 90 and P-90 preferred share agreements at
December 31, 1996.
Common Stock. During 1996, the Company raised $2,593,000 through the issuance
of 1,377,306 restricted common shares. The Company issued 49,626 restricted
common shares for services and recorded compensation expense of $65,000 in
1996. As discussed in Note 5, the Company issued restricted common shares in
exchange for notes payable, accrued interest, and future interest obligations.
During 1995, the Company raised $1,024,000, net of offering costs of $48,000,
through the issuance of 963,035 restricted common shares. The Company issued
216,088 restricted common shares for services and recorded compensation expense
of $289,000 in 1995. As discussed in Note 5, the Company also issued
restricted common shares for accrued interest and future interest obligations.
During 1994, the Company raised $3,678,027, net of offering costs of $405,773,
through the issuance of 198,806 restricted common shares. The Company issued
500 restricted common shares for services and recorded $13,000 of compensation
expense.
At December 31, 1996, the Company has reserved 6,000,000 common shares for the
conversion of preferred stock into common stock and the exercise of outstanding
warrants.
Warrants. The following table summarizes disclosures required by SFAS 123
for warrant activity subsequent to December 31, 1993:
<TABLE>
Common shares under outstanding warrants
--------------------------------------------
Shares under Weighted-average
warrant exercise price
---------------------------------
<S> <C> <C>
Balance, December 31, 1993 193,087 $ 29.22
Granted 49,713 23.56
Exercised 2,274 17.68
Expired 18,318 49.73
----------
Balance, December 31, 1994 222,208 15.72
Granted 1,768,816 1.83
Exercised 274,829 1.16
Expired 16,925 21.85
----------
Balance, December 31, 1995 1,699,270 1.91
Granted 1,310,100 3.75
Forfeited 24,816 1.50
Exercised 473,528 1.06
Expired 3,450 50.00
----------
Balance, December 31, 1996 2,507,576 2.97
==========
</TABLE>
The Company changed the exercise prices for 80,703 shares to $15.00 per share
from exercise prices of $20.00 to $54.00 per share in 1994. The Company
changed the exercise prices for 2,667,153 shares to exercise prices of $20.00
to $.875 per share from exercise prices of $1.375 to $.60 per share in 1995.
The repricings changed the exercise price to the then current common stock
closing bid price.
The weighted average grant date fair market value of warrants granted in 1996
is $2.64 per share. Except for warrants to purchase 5,000 common shares at $.20
per share which were granted on December 12, 1994 when the closing bid price
was $13.75 per share, all warrants were granted at fair market value, are
exercisable at December 31, 1996, and are not subject to repurchase by the
Company. Approximately 1.9 million common shares underlying warrants have been
registered with the Securities and Exchange Commission as of December 31, 1996.
The following table provides the weighted-average exercise prices and the
weighted-average remaining contractual life for outstanding warrants at
December 31, 1996 grouped into three exercise price ranges:
<TABLE>
Weighted-average
Range of Shares under Weighted-average remaining
exercised prices warrant exercise prices contractual life
- ------------------ -------------- --------------- ------------------
<C> <C> <C> <C>
$.60 - $1.72 1,511,185 $ 0.91 3.75 years
.4375 - 10.00 961,040 5.24 5.89 years
18.00 - 54.00 35,351 29.39 2.26 years
</TABLE>
Pro Forma Information. As of December 31, 1996, the Company has outstanding
warrants as described above. The Company has elected to follow APB 25 and
related interpretations in accounting for the warrants because, as discussed
below, the alternative fair value accounting provided for under SFAS 123
requires use of option valuation models that were not developed for use in
valuing warrants. Under APB 25, because the exercise price of the Company's
warrants equals the market price of the underlying stock on the grant date, no
compensation expense is recorded.
Pro forma information regarding net loss and net loss per share is required by
SFAS 123, and has been determined as if the Company had accounted for the
warrants granted subsequent to December 31, 1994 under the fair value method
of SFAS 123. The fair value for these options was estimated at the grant date
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1995 and 1996, respectively: risk-free interest rate of
approximately 6% for both years; volatility factor of the expected market
price of the Company's common stock ranging from .737 to 1.631 and 1.604 to
1.721; weighted-average expected life of the option of 2.0 years for both
years, and a dividend yield of zero.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's warrants have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of the Company's warrants. For purposes of pro
forma disclosures, the estimated fair value of the warrants is expensed during
the grant year. The Company's historical and pro forma information follows
(in thousands, except for net loss per share information):
<TABLE>
Years ended December 31,
---------------------
1996 1995
---------------------
<S> <C> <C>
Net loss
Historical $ 4,259 $ 6,825
Pro Forma 6,859 8,918
Net loss per share
Historical $ (0.80) $ (2.46)
Pro Forma (1.28) (3.21)
</TABLE>
The Company granted warrants to employees for the purchase of 3,530,000 OCET
common shares at $1.00 per share in 1995, and canceled a warrant for 850,000
of those shares in January 1996. There is no current market for OCET common
stock. At December 31, 1996, warrants for the purchase of 2,305,000 OCET
common shares are exercisable; warrants for the remaining OCET common shares
become exercisable at various times through June 1998. All warrants to
purchase OCET common shares expire December 31, 1999.
8. Related Party Transactions
SGI has entered into the following transactions with related parties:
(a)The Company sold 200 Series P-90 preferred shares for $22,000 to two
officers in 1990. Each preferred share is convertible into 250 restricted
common shares upon payment of a price that was reduced from $15.00 per
share to $1.375 per share in 1995.
(b)The Company granted warrants to purchase a total of 820,000 common shares
to officers and directors in 1996, 1995, and 1994 at exercise prices ranging
from $0.875 to $40.00 per share. The exercise prices equaled or exceeded
the closing bid price on the grant dates. During 1995, the exercise prices
of warrants to purchase 498,500 and 70,000 common shares were changed to
$0.60 and $1.375, respectively (Note 7).
(c)During 1995 and 1996, the Company issued 10% notes payable totaling $354,000
to an entity controlled by a Board member. The notes and accrued interest
were converted into 283,200 restricted common shares in 1996. Also during
1995, an officer advanced the Company a total of $52,000 and was repaid.
(d)The Company had receivables from two officers of $398,000 at December 31,
1994. A portion of this receivable was offset by obligations of the Company
to both of the officers and the remaining $224,000 was reserved at December
31, 1995. In January 1996, the Company agreed to forgive the loans made to
a former officer.
(e)The Company has an agreement with an officer/shareholder for the assignment
of his patent to the Company. The agreement provides for a royalty equal to
the greater of (i) $50,000 per calendar year or (ii) one-tenth of one
percent (.1%) of royalty revenues received by the Company (or any joint
venture of which the Company is a partner) through December 31, 2000,
conditioned only upon the continued practice of the LFC Process technology
during such period by the Company and/or any such joint venture. The
Company recognized royalty expense of $50,000 in each of the years ended
December 31, 1995 and 1994. During 1996, the officer/shareholder agreed to
forego all past and future royalty payments pursuant to the agreement. The
accrued liability of $142,000 at December 31, 1995 was recorded as other
income in 1996.
(f)Three employees exercised warrants in August 1995 for 274,154 common shares
in exchange for notes payable of $308,000. The 8% notes were non-recourse
and were payable August 23, 1999, only if the bid price for the Company's
common stock was in excess of $3.00 per share on that date. As of January,
1995 the employees had pledged 321,341 restricted common shares as
collateral for the notes payable. During the first quarter of 1996, the
Company recorded compensation expense of $474,000 related to these
transactions as provided by Emerging Issues Task Force Abstracts Issue No.
95-16, "Accounting for Stock Compensation Arrangements with Employer Loan
Features under APB Opinion No. 25." During the second quarter of 1996, the
three employees exchanged 8% recourse notes payable August 23, 1999 for the
non-recourse notes. The Company collected all principal and interest
payments prior to December 31, 1996 and the note activity is reflected in
the accompanying balance sheets as a component of stockholders' equity
(deficit).
9. Commitments
(a)The Company leases its corporate offices under an operating lease agreement
which provides for annual escalation of rental payments and expires in
December 2000. The Company's OCET subsidiary leases its laboratory
facilities under an operating lease agreement which expires in May 2000.
AMS leases its manufacturing facility under an operating lease agreement
which expires in October 1997. Under the terms of the lease agreements, the
lessee pays taxes, maintenance and insurance. As of December 31, 1996, the
Company had no other significant commitments under capital or operating
leases. Total rent expense relating to leased facilities was $339,000,
$226,000 and $170,000 in 1996, 1995 and 1994, respectively.
Future minimum annual operating lease commitments are as follows:
<TABLE>
Year ending December 31,
- ------------------------
<S> <C>
1997 $ 347,000
1998 224,000
1999 226,000
2000 169,000
---------
$ 966,000
=========
</TABLE>
(b) As discussed in Note 4, the Company is required to make contributions to
the TEK-KOL Partnership.
10. Income Taxes
The significant components of the Company's deferred tax assets and liabilities
are:
<TABLE>
1996 1995
------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 17,295,000 $ 16,878,000
Depreciation and amortization 583,000 553,000
Research and development credits 380,000 350,000
Other 268,000 377,000
----------------------------
18,526,000 18,158,000
Deferred tax liabilities:
Other (731,000) (625,000)
-----------------------------
Net deferred tax assets 17,795,000 17,533,000
Deferred tax assets valuation allowance (17,795,000) (17,533,000)
-----------------------------
$ - $ -
=============================
</TABLE>
At December 31, 1996, the Company had net operating losses available for
carryforward for federal and state tax purposes of approximately $45.8 million
and $20.8 million respectively. Federal and state loss carryforwards of
$194,000 expired in 1996 and will not be available for carryforward into 1997.
The difference between federal and state loss carryforwards is primarily
attributable to the 50% limitation of California loss carryforwards. The
Company also has federal research credit carryforwards of approximately
$380,000 which will begin to expire in 2004 unless previously utilized.
Approximately $1,600,000 of the valuation allowance for deferred tax assets
relates to stock warrant deductions which, when recognized, will be allocated
directly to contributed capital.
11. Subsequent Events
The Company executed a funding agreement on April 14, 1997 which provides for
the sale of the Company's common stock in three tranches of $1,000,000
each pursuant to Reg. S. The number of shares in each tranch will be
determined by dividing the amount invested by the product of 75% multiplied by
the average of the closing bid price for the five trading days preceding the
investment. Funding of the first tranch (365,924 common shares at $2.7328
per share) was due immediately upon execution of the agreement. Funding of the
second and third tranches are due within 60 days and 120 days of April 14,
1997, respectively. The closing of the second and third tranches is subject to
certain minimum levels of price and trading volume of the Company's common
stock.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information required by this Part III will be provided in the Company's
definitive proxy statement for the Company's 1996 Annual Meeting of
Shareholders (involving the election of Directors), which definitive proxy
statement will be filed pursuant to Regulation 14A no later than 120 days
following the Company's fiscal year ended December 31, 1996, and is
incorporated herein by this reference to the following extent:
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information under the captions "Election of Directors - Information about
Nominees and Executive Officers" and "Executive Compensation - Compliance with
Section 16 of the Securities Exchange Act of 1934."
ITEM 11. EXECUTIVE COMPENSATION
The information under the captions "Information Concerning Board of Directors -
Compensation of Directors," and "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 13. CERTAIN TRANSACTIONS
The information under the captions "Executive Compensation - Certain
Relationships and Related Transactions."
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1&2 Financial Statements
See Index to Consolidated Financial Statements on Page 20 hereof.
Financial Statement schedules for which provision is
made under the applicable accounting regulations of the
Securities and Exchange Commission are not required
under the related instructions or are inapplicable and
therefore have been omitted.
(a) 3 Listing of exhibits
2.1 Merger Agreement between VDI and Genesis(2)
3.1.1 Articles of Incorporation, as amended(1)
3.1.2 Restated Articles of Incorporation(5)
3.1.3 Articles of Amendment to the Articles of Incorporation of SGI
International(26)
3.2.1 By-laws, as amended(2)(3)
3.2.2 Amended and Restated By-laws(5)
3.2.3 By-Laws, as Amended (9/20/90)(14)
4.1.1 Form of Warrants - Authorized Before 1987(1)
4.1.2 Form of Warrants - Series A through H(5)
4.1.21 Form of Amended Warrants(15)
4.1.22 Form of Amended Warrants(16)
4.1.3 Form of Warrants - Series I, M, S and P(5)
4.1.4 Form of Warrants - Series XX(12)
4.2 Loan Agreement with Seaport Ventures, Inc.(4)
4.3 Loan Agreement with Arthur & Sophie Brody(4)
4.4 Form of Series 86-B Promissory Notes(4)
4.5 Form of Series 86-C Promissory Notes(4)
4.6 Form of Series 87-A Promissory Notes(5)
4.7 Form of Series 87-B Promissory Notes(5)
4.8 Form of Series 88-A Promissory Notes(12)
4.9 Form of Series 88-B Promissory Notes(12)
4.10 Form of Series 88-C Promissory Notes(12)
4.11 Form of Series 89-A Promissory Notes(13)
4.12 Form of Series 89-B Promissory Notes(13)
4.13 Form of Series 89-AA Promissory Notes(13)
4.14 Form of Series 90-A Units (Promissory Note and Preferred Stock)(14)
4.15 Form of Series 90-B Units (Promissory Note and Preferred Stock)(14)
4.16 Form of Series 90-C Units (Promissory Note and Preferred Stock)(14)
4.17 Form of Series 90-D Units (Promissory Note and Preferred Stock)(14)
4.18 Form of Series P90 Preferred Stock(14)
4.19 Form of Series PS90 Preferred Stock(14)
4.20 Form of Series 91-A Units (Promissory Note and Preferred Stock)(17)
4.21 Form of Series 91-AA Units (Promissory Note and Preferred Stock)
(17)
4.22 Form of Series 91-B Units (Promissory Note and Preferred Stock)(17)
4.23 Form of Series 91-C Units (Promissory Note and Preferred Stock)(17)
4.24 Form of Series 91-D Units (Promissory Note and Preferred Stock)(17)
4.25 Form of Series 91-E Units (Promissory Note and Preferred Stock)(17)
4.26 Form of Series 91-V Units (Promissory Note and Preferred Stock)(17)
4.27 Form of Series 91-P Preferred Stock(17)
4.28 Form of Series 91-R Preferred Stock(17)
4.29 Form of Series 91-S Preferred Stock(17)
4.30 Form of Series 91-T Preferred Stock(17)
4.31 Form of Series 91-M Preferred Stock(17)
4.32 Form of Series 92-A Preferred Stock(19)
4.33 Form of Series 92-B Preferred Stock(19)
4.34 Form of Series 93-A Units (Promissory Note and Preferred Stock)(22)
4.35 Form of Series 93-B Units (Promissory Note and Preferred Stock)(22)
4.36 Form of Series 93-C Units (Promissory Note and Preferred Stock)(22)
4.37 Form of Series 94-A Units (Promissory Note and Preferred Stock)(23)
4.38 Form of Series 94-B Units (Promissory Note and Preferred Stock)(23)
4.39 Form of Series 94-C Units (Promissory Note)(23)
4.40 Form of Series 95-C Convertible Preferred Stock (25)
4.41 Form of Series 95-D1 Redeemable Convertible Preferred Stock (25)
4.41.1 Form of Series 95-D1.03 Convertible Preferred Stock (26)
4.41.2 Form of Series 95-D1.04 Convertible Preferred Stock (26)
4.42 Form of Series 95-E Redeemable Convertible Preferred Stock (25)
4.43 Form of Series 95-R Convertible Preferred Stock (26)
4.44 Form of Series 96-A Convertible Preferred Stock (28)
4.45 Form of Series 96-B Convertible Preferred Stock (28)
10.1.1 Amended and Restated Agreements with LFC Technology
Partners - Pre 10/1/87(4)
10.1.2 Amended Technology Transfer Agreement dated 10/1/87(5)
10.1.3 Research Agreement Waiver (and Amended Research Notes) dated
10/1/87(5)
10.2 AEM Agreement(2)(3)
10.3.1 Assignment Agreement dated 11/13/84 with Ernest Esztergar(6)
10.3.2 First Amendment to Assignment Agreement dated 12/31/87 with Ernest
Esztergar(5)
10.4 Consulting Agreement with Alfred S. Bearman(1)
10.5 Design and Construction Contract with Dravo Engineers, Inc.(2)(3)
10.6.1 Coal Supply Contract with Western Energy Company(1)
10.6.2 Coal Supply Contract dated 12/7/87 with Western Energy Company(5)
10.6.3 Refuse Coal Supply Contract dated 12/7/87 with Western Company(5)
10.7.1 Power Purchase Contract with Montana Power Company(1)
10.8 Employment Agreement with Ernest Esztergar(2)(3)
10.8.1 Employment Agreement with Ernest Esztergar (1995)(26)
10.9 Employment Agreement with William M. Owens(2)(3)
10.9.1 Employment Agreement with William M. Owens(1995)(26)
10.10 Employment Agreement with Jeffrey L. Smith(2)(3)
10.11.1 Employment Agreement with Robert D. Krintzman (2)(3) and Amendment
thereto(4)
10.11.2 Revised Employment Agreement with Robert D. Krintzman(13)
10.11.3 Revised Employment Agreement with Robert D. Krintzman (4/1/90)(14)
10.12.1 Lease for executive offices at 3366 N.Torrey Pines Ct. #220, La
Jolla, CA 92037(4)
10.12.2 Month-to-Month lease for executive offices(5)
10.12.3 Lease of executive offices(13)
10.12.4 Lease of executive offices (LJF)(14)
10.12.4.1 First amendment to Lease of Executive offices dated as of
10/17/95 (26)
10.13 Investment Banking Agreement with Ladenburg, Thalmann & Co.,
Inc.(4)
10.14 Settlement Agreement dated 10/1/87 amongst Company, Jeffrey L.
Smith, Robert D. Krintzman
10.15 Modification Agreement dated as of 10/1/87(7)
10.15.1 Settlement Agreement dated as of December 10, 1992(18)
10.16 Agreement to Proceed (including Agreement to Proceed, LFC Release
and Addendum)(5)
10.17 Participation Agreement (including Participation Agreement,
Confidentiality Agreement and Addendum)(5)
10.18.1 Agreement dated as of July 1, 1988 between AEM and Company(9)
10.18.2 Agreement dated July 19, 1989 between SMC and Company(10)
10.19 Technology Purchase Agreement, dated as of 9/28/89(11)
10.20 Partnership Agreement, dated as of 9/30/89(11)
10.20.1 First Amendment to Partnership Agreement dated as of 12/1/91(17)
10.20.2 Second Amendment to Partnership Agreement dated as of 5/1/95(26)
10.21 SGI Assignment Agreement, dated as of 9/30/89(11)
10.22 SMC Assignment Agreement, dated as of 9/30/89(11)
10.23 Coal Handling License, dated as of 9/30/89(11)
10.24 License to SGI International, dated as of 9/30/89(11)
10.25 License to Shell Mining Company, dated as of 9/30/89(11)
10.25.1 First Amendment to License to Shell Mining Company, dated as
of 5/01/95(26)
10.26 SGI Services Agreement, dated as of 9/30/89(11)
10.26.1 ENCOAL/SGI Services Agreement, dated as of 7/18/90(14)
10.27 SMC Services Agreement, dated as of 9/30/89(11)
10.28 Accounting Procedures(11)
10.29 Confidentiality Addendum(11)
10.30 Addendum to Documents 10.19 through 10.29(11)
10.31 SGI International 1990 Stock Option Plan(14)
10.32 Letter of Intent dated June 5, 1993 between Company & Shanxi Coal
Bureau, China(20)
10.33 Letter of Intent dated July 16, 1993 between Company & Fushun Coal
Mine Administration, China (20)
10.34 Letter of Intent dated January 28, 1994 between Company and
Shandong Provincial Coal Bureau, and Comprehensive Utilization
Corporation of Shandong Coal Industry, China(21)
10.35 Acquisition Agreement dated as of September 8, 1995(25)
10.35.1 Lending and Commitment Agreement dated as of September 8, 1995(25)
10.35.2 First Amendment to Acquisition and Funding Agreement dated as of
September 22, 1995
10.35.3 Second Amendment to Acquisition & Funding Agreement dated as of
October 20, 1995 (24)
10.36 Technology Transfer Agreement (SGI/OCET) dated 3/17/95(26)
10.36.1 First Amendment to Technology Transfer Agreement dated as
of 5/15/95 (26)
10.36.2 Second Amendment to Technology Transfer Agreement dated as of
August 25, 1996 (28)
10.37 Employment Agreement with Joseph A. Savoca dated as of
June 12, 1995 (26)
18.1 Letter re: Change in Accounting Principles(4)
22.1 Subsidiaries(5)
23.1 Consent of Ernst & Young LLP, Independent Auditors(28)
28.1 Agreement dated June 20, 1988(8)
28.2 Modification Agreement dated August 1, 1988(8)
28.3 Colstrip Notes(8)
28.4.1 Other Notes (Healy Alaska)(8)
28.4.2 Other Notes (Jackson, Michigan)(8)
28.4.3 Other Notes (Muskegon, Michigan)(8)
28.4.4 Other Notes (Buelah, North Dakota)(8)
28.4.5 Other Notes (Anchorage, Alaska)(8)
28.5 LTI Agreement(8)
28.6 SGI/MOP General Release(8)
28.7 Creditor Releases(8)
28.8 SGIF/DOE/METC Agreement dated 9/20/91(17)
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-14 (File No. 2-93124) (the "Registration Statement") filed on
September 6, 1984.
(2) Incorporated by reference to Amendment No. 2 to the Registration Statement
filed on April 24, 1985.
(3) Incorporated by reference to Report on Form 10-K (File No. 2-93124) for the
year ended December 31, 1985.
(4) Incorporated by reference to Report on Form 10-K (File No. 2-93124) for the
year ended December 31, 1986.
(5) Incorporated by reference to Report on Form 10-K (File No. 2-93124) for
the year ended December 31, 1987.
(6) Incorporated by reference to Amendment No. 1 to the Registration Statement
filed on December 31, 1984.
(7) Incorporated by reference to Report on Form 10-Q (File No. 2-93124) for the
quarter ended September 30, 1987.
(8) Incorporated by reference to Report on Form 10-Q (File No. 2-93124) for the
quarter ended June 30, 1988.
(9) Incorporated by reference to Exhibit 10.18 (sic) in Report on Form 10-Q
(File No. 2-93124) for the fiscal quarter ended March 31, 1990.
(10) Incorporated by reference to Exhibit 10.18 (sic) in Report on Form 10-Q
(File No. 2-93124) for the fiscal quarter ended September 30, 1990.
(11) Incorporated by reference to Report on Form 10-Q (File No. 2-93124) for
the quarter ended March 31, 1990.
(12) Incorporated by reference to Report on Form 10-K (File No. 2-93124) for
the year ended December 31, 1988.
(13) Incorporated by reference to Report on Form 10-K (File No. 2-93124) for
the year ended December 31, 1989.
(14) Incorporated by reference to Report on Form 10-K (File No. 2-93124) for
the year ended December 31, 1990.
(15) Incorporated by reference to Exhibit 4 in Registration Statement on Form
S-8 (File No. 2-93124) filed December 1990.
(16) Incorporated by reference to Exhibit 4 in Registration Statement on Form
S-8 (File No. 2-93124) filed on March 1, 1991.
(17) Incorporated by reference to Report on Form 10-K (File No. 2-93124) for
the year ended December 31, 1991.
(18) Incorporated by reference to Report on Form 8-K (File No. 2-93124) filed
on January 15, 1993.
(19) Incorporated by reference to Report on Form 10-K (File No. 2-93124) for
the year ended December 31, 1992.
(20) Incorporated by reference to 1st Amendment to Form S-1 filed December 20,
1993.
(21) Incorporated by reference to 3rd Amendment to Form S-1 filed March 9, 1994.
(22) Incorporated by reference to Report on Form 10K (File No. 2-93124) for the
year ended December 31,1993.
(23) Incorporated by reference to Report on Form 10K(File No. 2-93124) for the
year ended December 31,1994.
(24) Incorporated by reference to Report on Form 10-Q (File No. 2-93124) for
the quarter ending September 30, 1995.
(25) Incorporated by reference to Report on Form 8-K/A (File No. 2-93124) filed
October 6, 1995.
(26) Incorporated by reference to Report on Form 10-K (File No. 2-93124) for
the year ended December 31, 1995.
(27) Incorporated by reference to Exhibit 4 in Registration Statement on Form
S-8 (File No. 2-93124) filed on December 26, 1996.
(28) Filed herewith.
(b) Reports on Form 8-K filed in the fourth quarter of 1996: None
(c) Exhibits - The response to this portion of Item 14 is submitted as a
separate section of this report
(d) Not applicable
SIGNATURES
Pursuant to requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on this 14th day of April 1997.
SGI INTERNATIONAL
/s/
By: ------------------------------
Joseph A. Savoca, Chairman/CEO
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.
SIGNATURE TITLE DATE
/s/
- ------------------ Chief Executive Officer April 14, 1997
Joseph A. Savoca Chairman of the Board
/s/
- ------------------
Bernard V. Baus Director April 14, 1997
/s/
- -------------------
Ernest P. Esztergar Director April 14, 1997
/s/
- -------------------
Norman Grant Director April 14, 1997
/s/
- ------------------- Director April 14, 1997
William Harris
/s/
- ------------------- Director April 14, 1997
William A. Kerr
INDEX TO EXHIBITS
Exhibit No. Title
4.44 Form of Series 96-A Convertible Preferred Stock
4.45 Form of Series 96-B Convertible Preferred Stock
10.36.2 Second Amendment to Technology Transfer Agreement dated as of
August 25, 1996
23.1 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
Incorporated Under the Laws of Utah
Number 96A- Shares 000
This certifies that:
is the registered Holder of
FULLY PAID AND NON-ASSESSABLE SERIES 96-A PREFERRED SHARE(S),
$.01 PAR VALUE,
OF
SGI INTERNATIONAL
1. Each Series 96-A Preferred Share evidenced by this Certificate is
transferrable on the books of the Corporation by the Holder hereof, in
person or by duly authorized attorney, upon surrender of this Certificate
properly endorsed.
2. On or after April 30, 1998, each Series 96-A Convertible Preferred
Share shall be convertible into 13,500 SGI Common Shares.
3. Series 96-A Preferred Shares have no voting rights.
4. Series 96-A Preferred Shares and the Common Stock into which they are
convertible will, upon issuance, be fully paid and non-assessable.
5. In the event that the Corporation shall at any time after issuance of
a Series 96-A Preferred Share: (i) declare or pay to the holders of the
Common Stock a dividend payable in any kind of shares of stock of the
Corporation; or (ii) split, reverse split or otherwise reclassify its
Common Stock into the same or a different number of shares with or without
par value or into shares of any class or classes; or (iii) consolidate or
merge with or transfer its property as an entirety or substantially as
an entirety to any other Corporation; or (iv) make any distribution of its
assets to holders of its Common Stock as a liquidation or partial
liquidation dividend or by way of return of capital; then, upon subsequent
conversion of a Series 96-A Preferred Share, a shareholder shall receive
in exchange for a Series 96-A Preferred Share, in addition to, in reduction
of, or in substitution for, the shares of Common Stock to which he would
otherwise be entitled upon such exercise, such additional shares of Common
Stock, or lesser number shares of Common Stock, as the case may be, or stock
or script of the Corporation, or such reclassified shares of stock of the
Corporation, or such shares of securities or property of the Corporation
resulting from such consolidation or merger or transfer, or such assets of
the Corporation, so that the value so received by the shareholder is
equivalent to the value which would have been received (and the total
consideration exchangeable by the shareholder is equivalent to the total
consideration which would otherwise have been exchangeable) had the
shareholder converted a Series 96-A Preferred Share into shares of Common
Stock immediately prior to the happening of any of the foregoing events.
6. THE SERIES 96-A PREFERRED SHARE(S)REPRESENTED BY THIS CERTIFICATE AND
THE COMMON STOCK INTO WHICH THEY ARE CONVERTIBLE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933. THE SHARE(S)HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES UNDER THE
SECURITIES ACT OF 1933, OR A PRIOR OPINION OF COUNSEL SATISFACTORY TO THE
ISSUER, THAT REGISTRATION IS NOT REQUIRED UNDER THAT ACT.
7. In the event of the voluntary liquidation, dissolution or other
termination of the Corporation, the holders of the Series 96-A Preferred
Shares shall be entitled to recover only a cash payment of Ten Thousand
Dollars ($10,000.00) per Series 96-A Preferred Share. Such payment shall
be made before any payment or distribution is made to the holders of the
Common Stock, or any other series of Preferred Stock of the Corporation,
other than previously issued Series of Preferred Shares.
In witness whereof the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be affixed
hereto this day of , 1996.
CHAIRMAN OF THE BOARD
SECRETARY
/s/ /s/
========================== ======================
The following abbreviations, when used in the inscription on the fact of
this certificate, shall be construed as though they were written out in
full according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as tenants
in common
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED,
hereby sell, assign and transfer unto
- -----------------------------------------------------
Please insert Social Security or other identifying number of assignee
(Please print or typewrite name and address, including zip code,of assignee)
Shares of capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint Attorney to transfer the said stock on
the books of the within named Corporation with full power of substitution
in the premises.
DATED:
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the certificate in every particular, without
alteration or enlargement or any change whatever.
96-B CONVERTIBLE PREFERRED SHARE CERTIFICATE
Incorporated Under the Laws of Utah
96B-00
This certifies that:
is the registered holder of [ ] share(s)of
Fully Paid and Non-Assessable Series 96-B Preferred Share(s),
$.01 Par Value,
of
SGI INTERNATIONAL
1. Each Series 96-B Preferred Share evidenced by this Certificate is
transferrable on the books of the Corporation by the Holder hereof,
in person or by duly authorized attorney, upon surrender of this
Certificate properly endorsed.
2. Each Series 96-B Convertible Preferred Share shall be convertible
into 3,000 SGI Common Shares ("Conversion Shares")without cost, on the
first to occur of the following: (1) August 30, 1998; OR, (2) on the date a
Registration Statement filed by SGI with the Securities & Exchange
Commission, including the registration of the Conversion Shares, is
declared effective by the SEC.
3. Series 96-B Preferred Shares have no voting rights
4. Series 96-B Preferred Shares and the Common Stock into which they are
convertible will, upon issuance, be fully paid and non-assessable.
5. In the event that the Corporation shall at any time after issuance of
a Series 96-B Preferred Share: (i) declare or pay to the holders of the
Common Stock a dividend payable in any kind of shares of stock of the
Corporation; or (ii) split, reverse split or otherwise reclassify its
Common Stock into the same or a different number of shares with or
without par value or into shares of any class or classes; or (iii)
consolidate or merge with or transfer its property as an entirety or
substantially as an entirety to any other corporation; or (iv) make any
distribution of its assets to holders of its Common Stock as a liquidation
or partial liquidation dividend or by way of return of capital; then,
upon subsequent conversion of a Series 96-B Preferred Share, a shareholder
shall receive in exchange for a Series 96-B Preferred Share, in addition to,
in reduction of, or in substitution for, the shares of Common Stock to
which he would otherwise be entitled upon such exercise, such additional
shares of Common Stock, or lesser number shares of Common Stock, as the
case may be, or stock or script of the Corporation, or such reclassified
shares of stock of the Corporation, or such shares of securities or property
of the Corporation resulting from such consolidation or merger or transfer,
or such assets of the Corporation, so that the value so received by the
shareholder is equivalent to the value which would have been received (and
the total consideration exchangeable by the shareholder is equivalent to
the total consideration which would otherwise have been exchangeable) had
the shareholder converted a Series 96-B Preferred Share into shares of
Common Stock immediately prior to the happening of any of the foregoing
events.
6. THE SERIES 96-B PREFERRED SHARE(S) REPRESENTED BY THIS CERTIFICATE
AND THE COMMON STOCK INTO WHICH THEY ARE CONVERTIBLE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933. THE SHARE(S) HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED, SOLD OR OTHERWISE T
RANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SHARES UNDER THE SECURITIES ACT OF 1933, OR A PRIOR OPINION OF
COUNSEL SATISFACTORY TO THE ISSUER, THAT REGISTRATION IS NOT REQUIRED
UNDER THAT ACT.
7. SGI agrees that the common stock underlying this Convertible Preferred
Share shall be granted "piggyback" registration rights as set forth herein.
The corporation shall be obligated to shareholder as follows:
During the period of two years from the date hereof, whenever the
Corporation proposes to file with the SEC a Registration Statement (other
than as to securities issued pursuant to an employee benefit plan or as to
a transaction subject to Rule 145 promulgated under the Act), it shall at
least 20 days prior to each such filing, give written notice of such proposed
filing to shareholders at its address as it appears on the records of the
Corporation, and shall offer to include in such filing all common shares
issuable upon conversion of this Convertible Preferred Share upon receipt by
the Corporation, not less than 10 days prior to the proposed filing date, of a
request therefor setting forth the facts with respect to such shares reasonably
necessary to be included in such Registration Statement. The Corporation shall
keep such Registration Statement effective for a period of at least 90 days.
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 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 conclude that the inclusion of any portion of such
securities in the offering 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 Shareholders and other security holders
of the Company possessing similar registration rights.
8. In the event of the voluntary liquidation, dissolution or other
termination of the Corporation, the holders of the Series 96-B Preferred
Shares shall be entitled to recover only a cash payment of Thirteen
Thousand Dollars ($13,000.00) per Series 96-B Preferred Share. Such payment
shall be made before any payment or distribution is made to the holders of
the Common Stock, or any other series of Preferred Stock of the Corporation,
other than previously issued Series of Preferred Shares.
In witness whereof the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be affixed
hereto this day of , 1996.
CHAIRMAN OF THE BOARD SECRETARY
/s/ /s/
- --------------------------- ------------------------
STOCK POWER
FOR VALUE RECEIVED,
hereby sell, assign and transfer unto
- ----------------------------------------
Please insert Social Security or other identifying number of assignee
(Please print or typewrite name and address, including zip code, of assignee)
Shares of capital stock represented by the within Certificate, and do
hereby irrevocably constitute and appoint
Attorney to transfer the said stock on the books of the within named
Corporation with full power of substitution in the premises.
DATED:
SIGNATURE
NOTICE: The signature to this assignment must correspond with the name
as written upon the face of the certificate in every particular, without
alteration or enlargement or any change whatever.
SECOND AMENDMENT TO THE TECHNOLOGY TRANSFER AGREEMENT
Recitals
This Second Amendment to the Technology Transfer Agreement (the "Second
Amendment") is made effective as of the 25th day of August 1996, (the
"Effective Date") by and between SGI International ("SGI") and OCET
Corporation ("OCET") with reference to the following facts:
A. SGI and OCET entered into a Technology Transfer Agreement (the
"Agreement") effective as of March 17, 1995; and,
B. On May 15, 1995, SGI and OCET entered into an Amendment (the "First
Amendment") to that Agreement in order to change the compensation payable
to SGI by OCET for the transfer; and,
C. OCET again desires to modify the compensation payable to SGI and is
willing to compensate SGI for that modification by issuing additional stock
to SGI.
AGREEMENT
NOW, THEREFORE, in consideration of the premises, covenants and conditions
set forth herein, SGI and OCET agree as follows:
1. To the extent that the Second Amendment is inconsistent with the
Agreement or the First Amendment, the Agreement and the First Amendment are
hereby amended.
2. OCET hereby agrees to issue an additional 500,000 shares of OCET common
stock to SGI in return for SGI's canceling and waiving any and all other
consideration, which OCET has agreed to pay SGI under either the Agreement
or the First Amendment.
3. SGI hereby agrees that, effective on the date it receives an additional
500,000 shares of OCET common stock, it shall no longer have any right to, or
claim to, any compensation of any kind from OCET under the Agreement or the
First Amendment and OCET's only obligation to SGI shall be for money loaned
to it pursuant to the inter-company account.
4. Except as is hereby amended the Agreement and the First Amendment are
still in full force and effect.
SGI international OCET Corporation
/s/ /s/
By:======================== By:=============================
Joseph A. Savoca, President Ernest P. Esztergar, President
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8) and in the related Prospectuses of our report dated March 20, 1997,
except Note 11, as to which the date is April 14, 1997, with respect to the
consolidated financial statements of SGI International, included in this Annual
Report (Form 10-K) for the year ended December 31, 1996, filed with the
Securities and Exchange Commission.
ERNST & YOUNG LLP
San Diego, California
April 15, 1997
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This schedule contains summary financial information extracted from SEC Form
10-K and is qualified in its entirety by reference to such financial
statements.
<LEGEND/>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 740,018
<SECURITIES> 0
<RECEIVABLES> 1,025,815
<ALLOWANCES> 0
<INVENTORY> 68,289
<CURRENT-ASSETS> 2,295,167
<PP&E> 548,601
<DEPRECIATION> 345,995
<TOTAL-ASSETS> 6,628,678
<CURRENT-LIABILITIES> 6,310,354
<BONDS> 0
0
887
<COMMON> 36,118,231
<OTHER-SE> (35,924,544)
<TOTAL-LIABILITY-AND-EQUITY> 194,574
<SALES> 3,938,854
<TOTAL-REVENUES> 4,244,268
<CGS> 3,440,381
<TOTAL-COSTS> 3,440,381
<OTHER-EXPENSES> 4,540,782
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 522,470
<INCOME-PRETAX> (4,259,365)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,259,365)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,259,365)
<EPS-PRIMARY> (80)
<EPS-DILUTED> (80)
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